QUARTERLY REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended
September 30, 2009

or

o

TRANSITION REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the transition period
from
to

Commission File Number: 000-53330

Federal Home Loan Mortgage
Corporation

(Exact name of registrant as
specified in its charter)

Freddie Mac

Federally chartered corporation

52-0904874

(State or other jurisdiction
of
incorporation or organization)

(I.R.S. Employer
Identification No.)

8200 Jones Branch Drive, McLean, Virginia

22102-3110

(Address of principal executive
offices)

(Zip Code)

(703) 903-2000

(Registrants telephone
number, including area code)

Indicate by check mark whether the
registrant: (1) has filed all reports required
to be filed by Section 13 or
15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. x Yes o No

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). o Yes o No

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.

Large
accelerated
filer o

Accelerated
filer o

Non-accelerated
filer (Do not check if a smaller
reporting
company)x

Smaller
reporting
company o

Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). o Yes x No

As of October 30, 2009, there were 648,337,003 shares
of the registrants common stock outstanding.

This Quarterly Report on
Form 10-Q
includes forward-looking statements, which may include
statements pertaining to the conservatorship and our current
expectations and objectives for the MHA Program and other
efforts to assist the U.S. residential mortgage markets, as well
as our future business plans, liquidity, capital management,
economic and market conditions and trends, market share,
legislative and regulatory developments, implementation of new
accounting standards, credit losses, internal control
remediation efforts, and results of operations and financial
condition on a GAAP, Segment Earnings and fair value basis. You
should not rely unduly on our forward-looking statements. Actual
results might differ significantly from those described in or
implied by such forward-looking statements due to various
factors and uncertainties, including those described in
(i) Managements Discussion and Analysis, or
MD&A, MD&A  FORWARD-LOOKING
STATEMENTS and RISK FACTORS in this
Form 10-Q
and in the comparably captioned sections of our Annual Report on
Form 10-K
for the year ended December 31, 2008, or 2008 Annual
Report, and our Quarterly Reports on
Form 10-Q
for the first and second quarters of 2009 and (ii) the
BUSINESS section of our 2008 Annual Report. These
forward-looking statements are made as of the date of this
Form 10-Q
and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date of
this
Form 10-Q,
or to reflect the occurrence of unanticipated events.

Throughout PART I of this Form 10-Q, including the
Financial Statements and MD&A, we use certain acronyms and
terms and refer to certain accounting pronouncements which are
defined in the Glossary.

You should read this MD&A in conjunction with our
consolidated financial statements and related notes for the
three and nine months ended September 30, 2009 and our 2008
Annual Report.

Overview

Freddie Mac was chartered by Congress in 1970 with a public
mission to stabilize the nations residential mortgage
market and expand opportunities for home ownership and
affordable rental housing. Our statutory mission is to provide
liquidity, stability and affordability to the U.S. housing
market. Our participation in the secondary mortgage market
includes providing our credit guarantee for residential
mortgages originated by mortgage lenders and investing in
mortgage loans and mortgage-related securities. Through our
credit guarantee activities, we securitize mortgage loans by
issuing PCs to third-party investors. We also resecuritize
mortgage-related securities that are issued by us or Ginnie Mae
as well as private, or non-agency, entities by issuing
Structured Securities to third-party investors. We also
guarantee multifamily mortgage loans that support housing
revenue bonds issued by third parties and we guarantee other
mortgage loans held by third parties. Securitized
mortgage-related assets that back PCs and Structured Securities
that are held by third parties are not reflected as assets on
our balance sheets. We earn management and guarantee fees for
providing our guarantee and performing management activities
(such as ongoing trustee services, administration of
pass-through amounts, paying agent services, tax reporting and
other required services) with respect to issued PCs and
Structured Securities.

We are focused on meeting the urgent liquidity needs of the U.S.
residential mortgage market, lowering costs for borrowers and
supporting the recovery of the housing market and
U.S. economy. By continuing to provide access to funding
for mortgage originators and, indirectly, for mortgage borrowers
and through our role in the Obama Administrations
initiatives, including the MHA Program, we are working to
meet the needs of the mortgage market by making homeownership
and rental housing more affordable, reducing the number of
foreclosures and helping families keep their homes.

We had net loss attributable to Freddie Mac of $5.0 billion
for the third quarter of 2009 and total equity of
$10.4 billion as of September 30, 2009. Net loss
attributable to common stockholders was $6.3 billion for
the third quarter of 2009, which includes the payment of
$1.3 billion of dividends in cash on the senior preferred
stock. Our financial results for the third quarter of 2009,
compared to the second quarter of 2009, reflect the unfavorable
impact of decreased interest rates on the fair value of our
derivatives and our guarantee asset, as well as increased
credit-related expenses. These unfavorable impacts were
partially offset by gains on trading securities due to
tightening OAS and lower interest rates, gains on sales of
available-for-sale
securities and reduced net impairments on
available-for-sale
securities recognized in earnings. Total equity increased
$2.2 billion during the quarter from $8.2 billion as
of June 30, 2009. The increase included $8.3 billion
of fair value improvement on available-for-sale securities
within AOCI, due primarily to declines in interest rates and
tightening of mortgage-to-debt OAS, offset by the third quarter
2009 net loss attributable to Freddie Mac of $5.0 billion
and senior preferred stock dividends of $1.3 billion.

We expect a variety of factors will continue to place downward
pressure on our financial results in future periods, and could
cause us to incur further GAAP net losses and request additional
draws from Treasury under the Purchase Agreement. Key factors
include the potential for continued deterioration in the housing
market and rising unemployment, which could result in additional
credit-related expenses and security impairments, adverse
changes in interest rates and spreads, which could result in
mark-to-market
losses, additional impairment of our investments in LIHTC
partnerships, and our efforts under the MHA Program and other
government initiatives, some of which are expected to have an
adverse impact on our financial results. While the housing
market has experienced recent modest home price improvements
beginning in the second quarter of 2009, we expect home price
declines in future periods. Consequently, our provisions for
credit losses will likely remain high during the remainder of
2009. Further, our senior preferred stock dividend obligation,
combined with potentially substantial quarterly commitment fees
payable to Treasury beginning in 2010 (the amounts of which have
not yet been determined), and our inability to pay down draws
under the Purchase Agreement will have a significant adverse
impact on our future net worth. To the extent that these factors
result in a negative net worth, we would be required to take
additional draws from Treasury under the Purchase Agreement. For
a discussion of factors that could result in additional draws,
see LIQUIDITY AND CAPITAL RESOURCES  Capital
Adequacy.

Recent
Management Changes

Several significant management changes occurred recently:



On August 10, 2009, Charles E. Haldeman, Jr.
began serving as our Chief Executive Officer and as a member of
our Board of Directors. Mr. Haldeman succeeded John A. Koskinen,
who served as our Interim Chief Executive Officer and performed
the functions of principal financial officer and who returned to
the position of Non-Executive Chairman of the Board;



On September 14, 2009, Bruce M. Witherell began
serving as our Chief Operating Officer; and

We continue to operate under the direction of FHFA as our
Conservator. During the conservatorship, the Conservator
delegated certain authority to the Board of Directors to
oversee, and to management to conduct, day-to-day operations so
that the company can continue to operate in the ordinary course
of business.

We changed certain business practices and other non-financial
objectives to provide support for the mortgage market in a
manner that serves public policy, but that may not contribute to
profitability. Some of these changes increase our expenses,
while others require us to forego revenue opportunities in the
near term. In addition, the objectives set forth for us under
our charter and by our Conservator, as well as the restrictions
on our business under the Purchase Agreement with Treasury, may
adversely impact our financial results, including our segment
results.

There is significant uncertainty as to whether or when we will
emerge from conservatorship, as it has no specified termination
date, and as to what changes may occur to our business structure
during or following our conservatorship, including whether we
will continue to exist. However, we are not aware of any current
plans of our Conservator to significantly change our business
structure in the near-term. As discussed below in
Legislative and Regulatory Matters  Federal
Legislation and Related Matters, Treasury and HUD, in
consultation with other government agencies, are expected to
develop legislative recommendations for the future of the GSEs.

MHA
Program and Other Efforts to Assist the Housing
Market

We are working with our Conservator to help distressed
homeowners through initiatives that support the MHA Program. We
also implemented a number of other initiatives to assist the
U.S. residential mortgage market and help families keep
their homes, some of which were undertaken at the direction of
FHFA. If our efforts under the MHA Program and other initiatives
to support the U.S. residential mortgage market do not
achieve their desired results, or are otherwise perceived to
have failed to achieve their objectives, we may experience
damage to our reputation, which may impact the extent of future
government support for our business.

During the third quarter of 2009, we continued to enhance our
infrastructure and capacity to support the MHA Program by
devoting significant internal resources to support the increased
activity under both of its key initiatives: the Home Affordable
Refinance Program and the Home Affordable Modification Program.

Home
Affordable Refinance Program

The Home Affordable Refinance Program gives eligible homeowners
with loans owned or guaranteed by Freddie Mac or Fannie Mae an
opportunity to refinance into loans with more affordable monthly
payments. The Freddie Mac Relief Refinance
Mortgagesm
is our implementation of the Home Affordable Refinance Program
for our loans. As of

September 30, 2009, we purchased approximately
98,000 loans totaling approximately $20.0 billion in
unpaid principal balance under this program, including
approximately 54,000 loans with current LTVs above 80%.

We expect to continue to experience strong demand for the
Freddie Mac Relief Refinance Mortgage due to low interest rates
and recent enhancements to the program. These enhancements were
designed to help more borrowers take advantage of the program,
and include:



increasing the maximum allowable current LTV ratio of a Freddie
Mac Relief Refinance Mortgage to 125%;



allowing borrowers to refinance a Freddie Mac-owned or
guaranteed mortgage with any lender affiliated with Freddie
Mac; and



increasing the amount of closing costs that can be included in
the new refinance mortgage up to $5,000.

Home
Affordable Modification Program, or HAMP

HAMP commits U.S. government, Freddie Mac and Fannie Mae
funds to help eligible homeowners avoid foreclosure and keep
their homes through mortgage modifications. We have focused our
loan modification efforts on HAMP since it was introduced in the
second quarter of 2009, and have completed 471 modifications
under HAMP as of September 30, 2009. Under HAMP, borrowers
must complete a trial period of three or more months before the
loan is modified. Our overall loan modification volume declined
in the third quarter of 2009 as compared to the second quarter
of 2009 because borrowers did not begin entering into trial
periods under HAMP in significant numbers until early in the
third quarter and, in many cases, trial periods were extended
beyond the initial three month period as HAMP guidelines were
modified. Based on information reported by our servicers to the
MHA program administrator, more than 88,000 loans that we own or
guarantee were in the trial period portion of the HAMP process
as of September 30, 2009. Trial period loans under HAMP are
those where the borrower has made the first payment under the
terms of a trial period offer.

Through September 30, 2009, our loss mitigation activity
under HAMP has been primarily focused with our larger
seller/servicers, which service the majority of our loans, and
variations in their approaches may cause fluctuations in HAMP
processing volumes. There is uncertainty regarding the
sustainability of our current volume levels once our larger
seller/servicers complete the bulk of their initial efforts. The
completion rate for HAMP loans, which is the percentage of loans
that successfully exit the trial period due to the borrower
fulfilling the requirements for the modification, remains
uncertain due to the number of new requirements of this program.
We have undertaken several initiatives designed to increase the
number of loans modified under HAMP, including:



engaging a vendor to help ease backlogs at several servicers by
processing requests for HAMP modifications;



engaging a vendor to meet with eligible borrowers at their homes
and help them complete loan modification requests; and



implementing a second-look program designed to ensure that
borrowers are being properly considered for HAMP modifications.
Borrowers who do not qualify for HAMP are then considered under
the companys other foreclosure prevention programs.

We also serve as compliance agent for certain foreclosure
prevention activities under HAMP. Among other duties, as the
program compliance agent, we will conduct examinations and
review servicer compliance with the published requirements for
the program. We will report the results of our examination
findings to Treasury. Based on the examinations, we may also
provide Treasury with advice, guidance and lessons learned to
improve operation of the program.

The MHA Program is intended to provide borrowers the opportunity
to obtain more affordable monthly payments and to reduce the
number of delinquent mortgages that proceed to foreclosure and,
ultimately, mitigate our total credit losses by reducing or
eliminating a portion of the costs related to foreclosed
properties and avoiding the credit loss in REO. At present, it
is difficult for us to predict the full impact of the MHA
Program on us. However, to the extent our borrowers participate
in HAMP in large numbers, the costs we incur, including the
servicer and borrower incentive fees, could be substantial.
Under HAMP, Freddie Mac will bear the full cost of the monthly
payment reductions related to modifications of loans we own or
guarantee, and all servicer and borrower incentive fees, and we
will not receive a reimbursement of these costs from Treasury.
In addition, we continue to devote significant internal
resources to the implementation of the various initiatives under
the MHA Program. It is not possible at present to estimate
whether, and the extent to which, costs, incurred in the near
term, will be offset by the prevention or reduction of potential
future costs of loan defaults and foreclosures due to these
initiatives.

Our Other
Recent Efforts to Assist the U.S. Housing Market



During the nine months ended September 30, 2009, we
purchased or guaranteed $444.2 billion in unpaid principal
balance of mortgages and mortgage-related securities for our
total mortgage portfolio. This amount

included $382.0 billion of newly-issued PCs and Structured
Securities. Our purchases and guarantees of single-family
mortgage loans provided financing for approximately
1.78 million conforming single-family loans, of which
approximately 82% consisted of refinancings. We also remain a
key source of liquidity for the multifamily market with
purchases or guarantees of mortgages that financed approximately
181,000 multifamily units during the nine months ended
September 30, 2009;



In addition to supporting HAMP, we continued to help borrowers
stay in their homes or sell their properties through our other
programs. For example, we completed more than
8,000 non-HAMP loan modifications and nearly
18,000 repayment plans, forbearance agreements and
pre-foreclosure sales during the third quarter of 2009;



We have entered into standby commitments to purchase
single-family and multifamily mortgages from a financial
institution that provides short-term loans, known as warehouse
lines of credit, to mortgage originators. In October 2009, we
announced a pilot program to help our seller/servicers obtain
warehouse lines of credit with certain participating warehouse
lenders;



In October 2009, we announced our participation in the Housing
Finance Agency initiative, which is a collaborative effort of
Treasury, FHFA, Freddie Mac, and Fannie Mae. Under this
initiative, we will give credit and liquidity support to state
and local housing finance agencies so that such agencies can
continue to meet their mission of providing affordable financing
for both single-family and multifamily housing;



Despite challenging conditions, in October 2009, we completed
our second securitization transaction with multifamily mortgage
loans this year, which totaled approximately $1 billion;



We expect to participate in more than 300 foreclosure prevention
workshops during 2009, reaching borrowers in more than
25 states nationwide. In the first half of 2009, Freddie
Mac contributed nearly $5 million to non-profit
organizations to help educate borrowers about their options and
prevent fraud. We will be providing additional grants to
organizations that are working to support the MHA program. These
organizations will assist borrowers in completing HAMP
requirements.

Government
Support for our Business

We are dependent upon the continued support of Treasury and FHFA
in order to continue operating our business. We also receive
substantial support from the Federal Reserve. Our ability to
access funds from Treasury under the Purchase Agreement is
critical to keeping us solvent and avoiding the appointment of a
receiver by FHFA under statutory mandatory receivership
provisions.

We had a positive net worth at September 30, 2009 as our
assets exceeded our liabilities by $10.4 billion.
Therefore, we did not require additional funding from Treasury
under the Purchase Agreement. However, we expect to make
additional draws under the Purchase Agreement in future periods
due to a variety of factors that could adversely affect our net
worth.

Significant developments with respect to the support we receive
from the government include the following:



The aggregate liquidation preference of the senior preferred
stock was $51.7 billion as of September 30, 2009. To
date, we have paid total dividends of $3.0 billion in cash
on the senior preferred stock to Treasury, at the direction of
the Conservator.



Treasury continues to purchase our mortgage-related securities
under a program it announced in September 2008. According to
information provided by Treasury, as of September 30, 2009
it held $176.0 billion of mortgage-related securities
issued by us and Fannie Mae. Treasurys purchase authority
under this program is scheduled to expire on December 31,
2009.



No amounts have been borrowed under the Lending Agreement as of
September 30, 2009. However, we have successfully tested
our ability to access funds under the Lending Agreement.



The Federal Reserve continues to purchase our debt and
mortgage-related securities under a program it announced in
November 2008. According to information provided by the Federal
Reserve, as of October 28, 2009 it had net purchases of
$325.6 billion of our mortgage-related securities and held
$54.0 billion of our direct obligations. On
September 23, 2009, the Federal Reserve announced that it
will gradually slow the pace of purchases under the program in
order to promote a smooth transition in markets and anticipates
that these purchases will be executed by the end of the first
quarter of 2010. As discussed below, the slowing of debt
purchases by the Federal Reserve and the conclusion of its debt
purchase program could adversely affect our ability to access
the unsecured debt markets.

It is difficult at this time to predict the impact that the
completion of the Federal Reserves and Treasurys
mortgage-related securities purchase programs will have on our
business and the U.S. mortgage market. It is possible

that interest rate spreads on mortgage-related securities could
widen, resulting in more favorable investment opportunities for
us following the completion of these programs. However, we may
be limited in our ability to take full advantage of any
potential investment opportunities because, beginning in 2010,
we must reduce our mortgage-related investments portfolio,
pursuant to the Purchase Agreement, by 10% per year, until it
reaches $250 billion.

For information on the potential impacts of the completion of
the Federal Reserves purchase program and the expiration
of the Lending Agreement with Treasury on our access to the debt
markets and our liquidity backstop plan, see Liquidity and
Capital Resources  Liquidity.

For more information on the terms of the conservatorship, the
powers of our Conservator and certain of the initiatives,
programs and agreements described above, see
BUSINESS  Conservatorship and Related
Developments in our 2008 Annual Report.

Housing
and Economic Conditions and Impact on Third Quarter 2009
Results

Our financial results for the third quarter of 2009 reflect the
continuing adverse economic conditions in the U.S. During 2009,
there have been some positive housing market developments,
including higher volumes of home sales and modest improvements
in home prices in certain regions and states. However, there
have been significant increases in unemployment rates which,
coupled with declines in household wealth, have contributed to
increases in residential mortgage delinquency rates. We believe
that much of the increase in home sales reflects distressed home
sales, including higher short sales and sales of foreclosed
properties in the market. As a result, we continue to experience
significant credit-related expenses. Our provision for credit
losses was $7.6 billion in the third quarter of 2009,
principally due to increased estimates of incurred losses caused
by the deteriorating economic conditions, which were evidenced
by our increased rates of delinquency, the significant volume of
REO acquisitions and an increase in our single-family
non-performing assets.

Home prices nationwide increased an estimated 0.3% in the third
quarter of 2009 (and an estimated 0.9% during the nine months
ended September 30, 2009) based on our own internal index.
However, many regions and states suffered significant home price
declines in the last two years. The percentage decline in home
prices in the last two years has been particularly large in the
states of California, Florida, Arizona and Nevada, which
comprised approximately 25% of the loans in our single-family
mortgage portfolio as of September 30, 2009. The second and
third quarters of the year are historically strong periods for
home sales. Seasonal strength along with the impact of state and
federal government actions, including incentives for first time
homebuyers and foreclosure suspensions, may have contributed to
the increase in home prices during the third quarter of 2009. We
expect that when temporary government actions expire and the
seasonal peak in home sales has passed, home prices are likely
to decline over the near term. Unemployment rates worsened in
the third quarter of 2009, and the national unemployment rate
increased to 9.8% at September 30, 2009 as compared to 9.5%
at June 30, 2009. Certain states experienced much higher
unemployment rates, such as California, Florida, Michigan and
Nevada, where the unemployment rate reached 12.2%, 11.0%, 15.3%
and 13.3%, respectively, at September 30, 2009. Loans
originated in these states comprised approximately 26% of the
loans in our single-family mortgage portfolio as of
September 30, 2009. Many financial institutions continued
to remain cautious in their lending activities during the third
quarter of 2009. Although there was overall improvement in
credit and liquidity conditions during the third quarter, credit
spreads for both mortgage and corporate loans remained higher
than before the start of the recession.

These macroeconomic conditions and other factors, such as our
temporary suspensions of foreclosure transfers of occupied
homes, contributed to an increase in the number and aging of
delinquent loans in our single-family mortgage portfolio during
the third quarter of 2009. Beginning in November 2008, we
temporarily suspended all foreclosure transfers of occupied
homes for certain periods ending March 6, 2009. Beginning
March 7, 2009, we began suspension of foreclosure transfers
on owner-occupied homes where the borrower may be eligible to
receive a loan modification under HAMP. We also observed a
continued increase in market-reported delinquency rates for
mortgages serviced by financial institutions, not only for
subprime and
Alt-A loans
but also for prime loans, and we experienced significant
increases in delinquency rates for all product types during the
third quarter of 2009. Additionally, as the slump in the U.S.
housing market has lasted over two years, increasing numbers of
borrowers that previously had significant equity in their homes
are now underwater, or owing more on their mortgage
loans than their homes are currently worth.

The continued weakness in housing market conditions during the
third quarter of 2009 also led to a further decline in the
performance of the non-agency mortgage-related securities in our
mortgage-related investments portfolio. Mortgage-related
securities backed by subprime, option ARM,
Alt-A and
other loans have significantly greater concentrations in the
states that are undergoing the greatest stress, including
California, Florida, Arizona and Nevada.

As a result of these and other factors, we recognized
impairments of
available-for-sale
securities in earnings during the third quarter of 2009.

Multifamily housing fundamentals deteriorated during the third
quarter of 2009, reflecting an increasing unemployment rate and
reduced access to credit for individual and institutional
borrowers. Partially as a result of home ownership becoming more
affordable over the past several years, multifamily properties
experienced declining rent levels and vacancy rates rose to
multi-year highs. This trend negatively impacted multifamily
property cash flows in the third quarter of 2009. Our
multifamily delinquency rate was unchanged at September 30,
2009 from 11 basis points as of June 30, 2009, though
we expect it to increase during the remainder of 2009. During
2009, we have also seen significant deterioration in the
financial strength of certain multifamily borrowers in measures
such as the debt coverage ratio and estimated current LTV ratios
for the properties.

Consolidated
Results of Operations  Third Quarter 2009

Net income (loss) was $(5.0) billion and
$(25.3) billion for the third quarters of 2009 and 2008,
respectively. Net loss decreased in the third quarter of 2009
compared to the third quarter of 2008, principally due to lower
impairment-related losses on mortgage-related securities, higher
net interest income, and fair value gains on our guarantee asset
and other investment activities, compared to losses on these
items during the third quarter of 2008. These income and gains
for the third quarter of 2009 were partially offset by increased
provision for credit losses, losses on debt recorded at fair
value and losses on loans purchased, compared to the third
quarter of 2008.

Net interest income was $4.5 billion for the third quarter
of 2009, compared to $1.8 billion for the third quarter of
2008. As compared to the third quarter of 2008, we held higher
amounts of fixed-rate mortgage loans and agency mortgage-related
securities in our mortgage-related investments portfolio and had
lower funding costs, due to significantly lower interest rates
on our short- and long-term borrowings during the three months
ended September 30, 2009. Net interest income during the
three months ended September 30, 2009 also benefited from
the funds we received from Treasury under the Purchase
Agreement. These funds generate net interest income, because the
costs of such funds are not reflected in interest expense, but
instead as dividends paid on senior preferred stock.

Non-interest income (loss) was $(1.1) billion for the three
months ended September 30, 2009, compared to
$(11.4) billion for the three months ended
September 30, 2008. The decrease in non-interest loss in
the third quarter of 2009 was primarily due to improvements in
investment activity, which was a gain of $1.4 billion in
the third quarter of 2009 as compared to a loss of
$9.8 billion in the third quarter of 2008, and our
guarantee asset, which was a gain of $0.6 billion in the
third quarter of 2009 as compared to a loss of $1.7 billion
in the third quarter of 2008. These improvements were partially
offset by a $2.3 billion increase in derivatives losses,
net of foreign-currency related effects. The decrease in losses
on investment activity during the third quarter of 2009 was due
principally to lower impairment-related losses primarily
recognized on
available-for-sale
non-agency mortgage-related securities backed by subprime,
option ARM,
Alt-A and
other loans during the quarter, which decreased to
$1.2 billion in the third quarter of 2009, compared to
$9.1 billion in the third quarter of 2008.

Non-interest expenses increased to $8.5 billion in the
third quarter of 2009 from $7.8 billion in the third
quarter of 2008 due primarily to higher provision for credit
losses. Our results for the third quarter of 2008 included a
non-recurring securities administrator loss on investment
activity of $1.1 billion related to the September 2008
bankruptcy of Lehman Brothers Holdings, Inc. Credit-related
expenses totaled $7.5 billion and $6.0 billion for the
third quarters of 2009 and 2008, respectively, and included our
provision for credit losses of $7.6 billion and
$5.7 billion, respectively. The increase in provision for
credit losses was primarily due to the continued credit
deterioration in our single-family mortgage portfolio, reflected
in further increases in delinquency rates. Losses on loans
purchased increased to $531 million for the third quarter
of 2009, compared to $252 million for the third quarter of
2008, due to lower market valuations for delinquent and modified
loans in the third quarter of 2009, as compared to the third
quarter of 2008. We expect to incur losses on loans purchased in
the fourth quarter of 2009. Administrative expenses totaled
$433 million for the third quarter of 2009, up from
$308 million for the third quarter of 2008, primarily due
to a partial reversal of short-term compensation expenses
recorded in the third quarter of 2008.

Segment
Earnings

Our operations consist of three reportable segments, which are
based on the type of business activities each
performs  Investments, Single-family Guarantee and
Multifamily. Certain activities that are not part of a segment
are included in the All Other category. We manage and evaluate
performance of the segments and All Other using a Segment
Earnings approach, subject to the conduct of our business under
the direction of the Conservator. Segment Earnings differ
significantly from, and should not be used as a substitute for,
net income (loss) as determined in accordance with GAAP.

In the third quarter of 2009, we reclassified our investments in
commercial mortgage-backed securities and all related income and
expenses from the Investments segment to the Multifamily
segment. Prior periods have been reclassified to conform to the
current presentation.

(2)

Includes a non-cash charge, related to the establishment of a
partial valuation allowance against our deferred tax assets, net
that is not included in Segment Earnings of approximately
$1.9 billion and $4.7 billion for the three and nine
months ended September 30, 2009, respectively, as well as
$14.3 billion for both the three and nine months ended
September 30, 2008.

Segment Earnings is calculated for the segments by adjusting
GAAP net income (loss) for certain investment-related activities
and credit guarantee-related activities. Segment Earnings
includes certain reclassifications among income and expense
categories that have no impact on net income (loss) but provide
us with a meaningful metric to assess the performance of each
segment and our company as a whole. Segment Earnings does not
include the effect of the establishment of the valuation
allowance against our deferred tax assets, net. For more
information on Segment Earnings, including the adjustments made
to GAAP net income (loss) to calculate Segment Earnings and the
limitations of Segment Earnings as a measure of our financial
performance, see CONSOLIDATED RESULTS OF
OPERATIONS  Segment Earnings and
NOTE 16: SEGMENT REPORTING to our consolidated
financial statements.

Consolidated
Balance Sheets Analysis

During the nine months ended September 30, 2009, total
assets increased by $15.6 billion to $866.6 billion
while total liabilities decreased by $25.4 billion to
$856.2 billion. Total equity (deficit) was
$10.4 billion at September 30, 2009 compared to
$(30.6) billion at December 31, 2008.

Our cash and other investments portfolio increased by
$19.4 billion during the nine months ended
September 30, 2009 to $83.7 billion, primarily due to
a $10.3 billion increase in cash and cash equivalents and a
$9.7 billion increase in non-mortgage-related securities.
We received $6.1 billion and $30.8 billion in June
2009 and March 2009, respectively, pursuant to draw requests
that FHFA submitted to Treasury on our behalf to address the
deficits in our net worth as of March 31, 2009 and
December 31, 2008, respectively. Based upon our positive
net worth at June 30, 2009, we did not receive any
additional funding from Treasury during the three months ended
September 30, 2009.

The unpaid principal balance of our mortgage-related investments
portfolio decreased 2.6%, or $20.6 billion, during the nine
months ended September 30, 2009 to $784.2 billion. The
decrease in our mortgage-related investments portfolio is
attributable to a relative lack of favorable investment
opportunities, as evidenced by tighter spreads on agency
mortgage-related securities. We believe these tighter spread
levels are driven by the Federal Reserves and
Treasurys agency mortgage-related securities purchase
programs. We expect investment opportunities for agency
mortgage-related securities will remain limited while these
purchase programs remain in effect. Once these programs are
completed, it is possible that spreads could widen again, which
might create favorable investment opportunities. We may be
limited in our ability to take full advantage of any such
opportunities in future periods because, beginning in 2010, we
must reduce our mortgage-related investments portfolio pursuant
to the Purchase Agreement by 10% per year, until it reaches
$250 billion. We may be required to sell mortgage-related
assets in 2010 to meet the required 10% reduction, particularly
given the potential in coming periods for significant increases
in loan modifications and purchases of delinquent loans, both of
which result in the purchase of mortgage loans from our PCs for
our mortgage-related investments portfolio. In addition, further
widening of spreads could result in additional unrealized losses
on our available-for-sale securities.

Short-term debt decreased by $69.7 billion during the nine
months ended September 30, 2009 to $365.4 billion, and
long-term debt increased by $30.5 billion to
$438.4 billion. As a result, our outstanding short-term
debt, including the current portion of long-term debt, decreased
as a percentage of our total debt outstanding to 45% at
September 30, 2009 from 52% at December 31, 2008. The
increase in our long-term debt reflects the improvement during
2009 of spreads on our debt and our continued favorable access
to the debt markets, primarily as a result of the Federal
Reserves purchases in the secondary market of our
long-term debt under its purchase program. In July 2009 we made
a tender offer to purchase $4.4 billion of our outstanding
Freddie
SUBS®
securities. We accepted $3.9 billion of the tendered
securities. This tender offer was consistent with our effort to
reduce our funding costs by retiring higher cost debt. Our
reserve for guarantee losses on PCs increased by
$13.7 billion to $28.6 billion during the nine months
ended September 30, 2009 as a result of an increase in
probable incurred losses, primarily attributable to the overall
macroeconomic environment, including continued weakness in the
housing market and increasing unemployment.

Total equity (deficit) increased from $(30.6) billion at
December 31, 2008 to $10.4 billion at
September 30, 2009, reflecting increases due to
(i) $36.9 billion we received from Treasury under the
Purchase Agreement during the first nine months of 2009,
(ii) a $15.3 billion decrease in our unrealized losses
in AOCI, net of taxes, on our available-for-sale securities and
(iii) an increase in retained earnings (accumulated
deficit) of $15.0 billion, and a corresponding adjustment
of $(9.9) billion net of taxes, to AOCI, as a result of the
April 1, 2009 adoption of an amendment to the accounting
standards for investments in debt and equity securities
(FASB ASC 320-10-65-1).
These increases in total equity (deficit) were partially offset
by (i) a $14.1 billion net loss and
(ii) $2.8 billion of senior preferred stock dividends
for the nine months ended September 30, 2009. The
$15.3 billion decrease in the unrealized losses in AOCI,
net of taxes, on our available-for-sale securities during the
nine months ended September 30, 2009 was largely due to
(i) fair value improvement on our available-for-sale
mortgage-related securities, particularly during the third
quarter of 2009, primarily as a result of tighter
mortgage-to-debt OAS and lower interest rates, and (ii) the
recognition in earnings of other-than-temporary impairments on
our non-agency mortgage-related securities.

Consolidated
Fair Value Results

During the three months ended September 30, 2009, the fair
value of net assets, before capital transactions, increased by
$4.1 billion compared to a decrease of $36.7 billion
during the three months ended September 30, 2008. The fair
value of net assets as of September 30, 2009 was
$(67.7) billion, compared to $(70.5) billion as of
June 30, 2009. Included in our fair value results for the
three months ended September 30, 2009 are the
$1.3 billion of dividends paid in cash to Treasury on our
senior preferred stock. The increase in the fair value of our
net assets, before capital transactions, during the three months
ended September 30, 2009 principally relates to an increase
in the fair value of our mortgage-related investments portfolio,
resulting from higher core spread income and net tightening of
mortgage-to-debt OAS.

Liquidity
and Capital Resources

Liquidity

Our access to the debt markets has improved since the height of
the credit crisis in the fall of 2008. The support of Treasury
and the Federal Reserve in recent periods has contributed to
this improvement. During the third quarter of 2009, the Federal
Reserve continued to be an active purchaser in the secondary
market of our long-term debt under its purchase program and, as
a result, spreads on our debt remained favorable. Debt spreads
generally refer to the difference between the yields on our debt
securities and the yields on a benchmark index or security, such
as LIBOR or Treasury bonds of similar maturity. During the third
quarter of 2009, we were able to continue to reduce our use of
short-term debt by issuing long-term and callable debt. See
MD&A  LIQUIDITY AND CAPITAL
RESOURCES  Liquidity in our 2008 Annual Report
for more information on our debt funding activities and risks
posed by current market challenges and RISK FACTORS
in our 2008 Annual Report for a discussion of the risks to our
business posed by our reliance on the issuance of debt to fund
our operations.

Treasury and the Federal Reserve have taken a number of actions
affecting our access to debt financing, including the following:



Treasury entered into the Lending Agreement with us on
September 18, 2008, under which we may request funds until
its scheduled expiration on December 31, 2009. As of
September 30, 2009, we had not borrowed under the Lending
Agreement. However, we have successfully tested our ability to
access funds under the Lending Agreement.



The Federal Reserve has implemented a program to purchase, in
the secondary market, up to $200 billion in direct
obligations of Freddie Mac, Fannie Mae, and the FHLBs. On
September 23, 2009, the Federal Reserve announced that it
will gradually slow the pace of purchases under the program in
order to promote a smooth transition in markets and anticipates
that the purchases will be executed by the end of the first
quarter of 2010.

The scheduled expiration of the Lending Agreement and completion
of the Federal Reserves debt purchase program could
adversely affect our ability to access the unsecured debt
markets, making it more difficult or costly to fund our
business. The completion of these programs could negatively
affect the spreads on our debt and limit our ability to issue
long-term and callable debt. This may also adversely affect our
ability to replace our short-term funding with longer-term debt.

Upon expiration of the Lending Agreement, we will not have a
liquidity backstop (other than Treasurys ability to
purchase up to $2.25 billion of our obligations under its
permanent statutory authority) if we are unable to obtain
funding from issuances of debt or other conventional sources. At
present, we are not able to predict the likelihood that a
liquidity backstop will be needed, or to identify the
alternative sources of liquidity that might then be available to
us, other than draws from Treasury under the Purchase Agreement
or Treasurys ability to purchase up to $2.25 billion
of our obligations under its permanent statutory authority. In
addition, market conditions could limit the availability of the
assets in our mortgage-related investments portfolio as a
significant source of funding. If we were unable to obtain
funding from issuances of debt or other conventional sources at
suitable terms or in sufficient amounts, it is likely that the
funds potentially available from Treasury would not be adequate
to operate our business.

Based on the current aggregate liquidation preference of the
senior preferred stock, Treasury is entitled to annual cash
dividends of $5.2 billion, which exceeds our annual
historical earnings in most periods. To date, we have paid
$3.0 billion in cash dividends on the senior preferred
stock. Continued cash payment of senior preferred dividends
combined with potentially substantial quarterly commitment fees
payable to Treasury beginning in 2010 (the amounts of which must
be determined by December 31, 2009), will have an adverse
impact on our future financial condition and net worth. Further
draws from Treasury under the Purchase Agreement would increase
the liquidation preference of and the dividends we owe on, the
senior preferred stock and, therefore, payment of our dividend
obligations in cash could contribute to the need for additional
draws from Treasury.

Capital
Adequacy

On October 9, 2008, FHFA announced that it was suspending
capital classification of us during conservatorship in light of
the Purchase Agreement.

The Purchase Agreement provides that, if FHFA, as Conservator,
determines as of quarter end that our liabilities have exceeded
our assets under GAAP, upon FHFAs request on our behalf,
Treasury will contribute funds to us in an amount equal to the
difference between such liabilities and assets, up to the
maximum aggregate amount that may be funded under the Purchase
Agreement. At September 30, 2009, our assets exceeded our
liabilities by $10.4 billion. Because we had a positive net
worth as of September 30, 2009, FHFA has not submitted a
draw request on our behalf to Treasury for any additional
funding under the Purchase Agreement. We also did not require
additional funding under the Purchase Agreement based on our
positive net worth at the end of the second quarter of 2009. The
aggregate liquidation preference of the senior preferred stock
is $51.7 billion and the amount remaining under the
Treasurys funding agreement is $149.3 billion as of
September 30, 2009.

We expect to make additional draws under the Purchase Agreement
in future periods, due to a variety of factors that could
materially affect the level and volatility of our net worth. For
additional information concerning the potential impact of the
Purchase Agreement, including making additional draws, see
RISK FACTORS in our 2008 Annual Report. For
additional information on our capital management during
conservatorship and factors that could affect the level and
volatility of our net worth, see LIQUIDITY AND CAPITAL
RESOURCES  Capital Adequacy and
NOTE 9: REGULATORY CAPITAL to our consolidated
financial statements.

Risk
Management

Credit
Risks

Overview

During the current economic crisis, the mortgage markets have
relied on Freddie Mac to provide a reliable source of liquidity,
stability and affordability through our investment and credit
guarantee activities. However, our business activities,
including the additional activities we have undertaken during
the current economic crisis, expose us to credit risk, primarily
mortgage credit risk and institutional credit risk. Mortgage
credit risk is the risk that a borrower will fail to make timely
payments on a mortgage we own or guarantee. We are exposed to
mortgage credit risk on our total mortgage portfolio because we
either hold the mortgage assets or have guaranteed mortgages in
connection with the issuance of a PC, Structured Security or
other mortgage-related guarantee. Institutional credit risk is
the risk that a counterparty that has entered into a business
contract or arrangement with us will fail to meet its
obligations.

Mortgage and credit market conditions remain challenging in 2009
due to a number of factors, including the following:



the effect of changes in other financial institutions
underwriting standards in past years, which allowed for the
origination of significant amounts of new higher-risk mortgage
products in 2006 and 2007 and the early months of 2008. These
mortgages have performed particularly poorly during the current
housing and economic downturn, and have defaulted at
historically high rates. However, even with the tightening of
underwriting standards, economic conditions will continue to
negatively impact recent originations;



increases in unemployment;



declines in home prices nationally and regionally during much of
the last two years;



higher incidence of institutional insolvencies;



higher levels of mortgage foreclosures and delinquencies;



higher incidence of fraud by borrowers, mortgage brokers and
other parties involved in real estate transactions;

The deterioration in the mortgage and credit markets increased
our exposure to both mortgage and institutional credit risks. A
number of factors make it difficult to predict when the mortgage
and credit markets will recover, including, among others,
uncertainty concerning the effect of current or any future
government actions in these markets. While our assumption for
home prices, based on our own index, continues to be for a
further decline in national home prices over the near term,
there continues to be divergence among economists about the
future economic outlook and when a sustained recovery in home
prices may occur.

Single-Family
Mortgage Portfolio

The following statistics illustrate the credit deterioration of
loans in our single-family mortgage portfolio, which consists of
single-family mortgage loans in our mortgage-related investments
portfolio and those backing our PCs, Structured Securities and
other mortgage-related guarantees.

Table 2 
Credit Statistics, Single-Family Mortgage
Portfolio(1)

As of

09/30/09

06/30/09

03/31/2009

12/31/2008

09/30/2008

Delinquency
rate(2)

3.33

%

2.78

%

2.29

%

1.72

%

1.22

%

Non-performing assets, on balance sheet (in millions)

$

17,334

$

14,981

$

13,445

$

11,241

$

9,840

Non-performing assets, off-balance sheet (in
millions)(3)

$

74,313

$

61,936

$

49,881

$

36,718

$

25,657

Single-family loan loss reserve (in millions)

$

29,174

$

24,867

$

22,403

$

15,341

$

10,133

REO inventory (in units)

41,133

34,699

29,145

29,340

28,089

For the Three Months Ended

09/30/09

06/30/09

03/31/2009

12/31/2008

09/30/2008

(in units, unless noted)

Loan
modifications(4)

9,013

15,603

24,623

17,695

8,456

REO acquisitions

24,373

21,997

13,988

12,296

15,880

REO disposition severity
ratio(5)

39.2

%

39.8

%

36.7

%

32.8

%

29.3

%

Single-family credit losses (in
millions)(6)

$

2,138

$

1,906

$

1,318

$

1,151

$

1,270

(1)

See OUR PORTFOLIOS and GLOSSARY for
information about our portfolios.

(2)

Single-family delinquency rate information is based on the
number of loans that are 90 days or more past due and those
in the process of foreclosure, excluding Structured
Transactions. Mortgage loans whose contractual terms have been
modified under agreement with the borrower are not included if
the borrower is less than 90 days delinquent under the
modified terms. Delinquency rates for our single-family mortgage
portfolio including Structured Transactions were 3.43% and 1.83%
at September 30, 2009 and December 31, 2008,
respectively.

(3)

Consists of delinquent loans in our single-family mortgage
portfolio which underlie our issued PCs and Structured
Securities, based on unpaid principal balances that are past due
for 90 days or more.

(4)

The number of executed modifications under agreement with the
borrower during the period. Excludes forbearance agreements,
which are made in certain circumstances and under which reduced
or no payments are required during a defined period, as well as
repayment plans, which are separate agreements with the borrower
to repay past due amounts and return to compliance with the
original terms. Based on information reported by our servicers
to the MHA program administrator, excludes 88,668 loans
that were in the trial period for the modification process under
HAMP as of September 30, 2009.

(5)

Calculated as the aggregate amount of our losses recorded on
disposition of REO properties during the respective quarterly
period divided by the aggregate unpaid principal balances of the
related loans with the borrowers. The amount of losses
recognized on disposition of the properties is equal to the
amount by which the unpaid principal balance of loans exceeds
the amount of net sales proceeds from disposition of the
properties. Excludes other related credit losses, such as
property maintenance and costs, as well as related recoveries
from credit enhancements, such as mortgage insurance.

(6)

See footnote (3) of Table 52  Credit Loss
Performance for information on the composition of credit
losses.

As the table above illustrates, we have experienced continued
deterioration in the performance of our single-family mortgage
portfolio due to several factors, including the following:



The expansion of the housing and economic downturn has reached a
broader group of single-family borrowers. The unemployment rate
in the U.S. rose from 7.2% at December 31, 2008 to
9.8% as of September 30, 2009. During 2009, the delinquency
rate of
30-year
fixed-rate amortizing loans, which is a more traditional
mortgage product, increased to 3.37% at September 30, 2009
as compared to 2.76% at June 30, 2009 and 1.69% at
December 31, 2008.



Certain loan groups within the single-family mortgage portfolio,
such as
Alt-A and
interest-only loans, as well as 2006 and 2007 vintage loans,
continue to be larger contributors to our worsening credit
statistics than other, more traditional loan groups. These loans
have been more affected by macroeconomic factors, such as
declines in home prices, which resulted in erosion in the
borrowers equity. These loans are also concentrated in the
West region. The West region comprised 27% of the unpaid
principal balances of our single-family mortgage portfolio as of
September 30, 2009, but accounted for 46% of our REO
acquisitions, based on the related loan amount prior to our
acquisition, and 37% of delinquencies in the nine months ended
September 30, 2009. In addition, states in the West region
(especially California, Arizona and Nevada) and Florida tend to
have higher average loan balances than the rest of the U.S. and
were most affected by the steep home price declines during the
last two years. California and Florida were the states with the
highest credit losses in the nine months ended
September 30, 2009, comprising 46% of our single-family
credit losses on a combined basis.

Loss
Mitigation

We are focused on initiatives that support the MHA Program. We
have taken several steps designed to support homeowners and
mitigate the growth of our non-performing assets. We continue to
expand our efforts to increase our use of foreclosure
alternatives, and have expanded our staff and engaged certain
vendors to assist our seller/servicers in completing loan
modifications and other outreach programs with the objective of
keeping more borrowers in their homes.

Our more recent loss mitigation activities create fluctuations
in our credit statistics. For example, our temporary suspensions
of foreclosure transfers of occupied homes temporarily slowed
the rate of growth of our REO inventory and of charge-offs, a
component of our credit losses, in certain periods since
November 2008, but caused our reserve for guarantee losses to
rise. This also has created an increase in the number of
delinquent loans that remain in our single-family mortgage
portfolio, which results in higher reported delinquency rates
than without the suspension of foreclosure transfers. In
addition, the implementation of HAMP in the second quarter of
2009 contributed to a temporary decrease in the number of
completed loan modifications in both the second and third
quarters of 2009 since there is a trial period before these
modifications become effective. Trial periods are required to
last for at least three months. Borrowers did not begin entering
into trial periods under HAMP in significant numbers until early
in the third quarter and, in many cases, trial periods were
extended beyond the initial three month period as HAMP
guidelines were modified.

Our servicers have a key role in the success of our loss
mitigation activities. The significant increases in delinquent
loan volume and the deteriorating conditions of the mortgage
market during 2008 and 2009 placed a strain on the loss
mitigation resources of many of our mortgage servicers. To the
extent servicers do not complete loan modifications with
eligible borrowers our credit losses could increase.

Investments
in Non-Agency Mortgage-Related Securities

Our investments in non-agency mortgage-related securities also
were affected by the deteriorating credit conditions in 2008 and
continuing into 2009. The table below illustrates the increases
in delinquency rates for loans that back our subprime first
lien, option ARM and
Alt-A
securities and associated gross unrealized losses, pre-tax. We
believe that unrealized losses on non-agency mortgage-related
securities at September 30, 2009 were attributable to poor
underlying collateral performance, decreased liquidity and
larger risk premiums in the non-agency mortgage market. These
securities comprise $100.7 billion of the
$180.8 billion of non-agency mortgage-related securities in
our mortgage-related investments portfolio as of
September 30, 2009. Given our forecast that national home
prices are likely to decline over the near term, the performance
of the loans backing these securities could continue to
deteriorate.

Total other-than-temporary impairment of available-for-sale
securities(5)

$

3,235

$

10,380

$

6,956

$

6,794

$

8,856

Portion of other-than-temporary impairment recognized in
AOCI(5)

2,105

8,223







Net impairment of available-for-sale securities recognized in
earnings for the three months
ended(5)

$

1,130

$

2,157

$

6,956

$

6,794

$

8,856

(1)

Based on the number of loans that are 60 days or more past
due. Mortgage loans whose contractual terms have been modified
under agreement with the borrower are not included if the
borrower is less than 60 days delinquent under the modified
terms.

(2)

Excludes non-agency mortgage-related securities backed by other
loans, which are primarily comprised of securities backed by
home equity lines of credit.

(3)

Based on the actual losses incurred on the collateral underlying
these securities. Actual losses incurred on the securities that
we hold are less than the losses on the underlying collateral as
presented in this table, as a majority of the securities we hold
include significant credit enhancements, particularly through
subordination.

(4)

Gross unrealized losses, pre-tax, represent the aggregate of the
amount by which amortized cost exceeds fair value measured at
the individual lot level.

(5)

Upon the adoption of an amendment to the accounting standards
for investments in debt and equity securities
(FASB ASC 320-10-35)
on April 1, 2009, the amount of credit losses and
other-than-temporary
impairment related to securities where we have the intent to
sell or where it is more likely than not that we will be
required to sell is recognized in our consolidated statements of
operations within the line captioned net impairment on
available-for-sale
securities recognized in earnings. The amount of
other-than-temporary
impairment related to all other factors is recognized in AOCI.
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  Change in Accounting Principles 
Change in the Impairment Model for Debt Securities
to our consolidated financial statements.

We held unpaid principal balances of $104.9 billion of
non-agency mortgage-related securities backed by subprime,
option ARM,
Alt-A and
other loans in our mortgage-related investments portfolio as of
September 30, 2009, compared to $119.5 billion as of
December 31, 2008. This decrease is due to the receipt of
monthly remittances of principal repayments from both the
recoveries of liquidated loans and, to a lesser extent,
voluntary prepayments on the underlying collateral of
$4.6 billion and $14.6 billion during the three and
nine months ended September 30, 2009, respectively,
representing a partial return of our investment in these
securities. We recorded net impairment of available-for-sale
securities recognized in earnings on non-agency mortgage-related
securities backed by subprime, option ARM,
Alt-A and
other loans of approximately $1.1 billion and
$10.2 billion for the three and nine months ended
September 30, 2009, respectively. See NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Change in
Accounting Principles  Change in the Impairment
Model for Debt Securities to our consolidated
financial statements for information on how other-than-temporary
impairments are recorded on our financial statements commencing
in the second quarter of 2009. Pre-tax unrealized losses on
securities backed by subprime, option ARM,
Alt-A and
other loans reflected in AOCI were $38.0 billion at
September 30, 2009. These unrealized losses include
$15.3 billion, pre-tax ($9.9 billion, net of tax), of
other-than-temporary impairment losses reclassified from
retained earnings to AOCI as a result of the second quarter 2009
adoption of an amendment to the accounting standards for
investments in debt and equity securities and increases in fair
value during the first nine months of 2009 of $7.9 billion
primarily due to (i) tighter mortgage-to-debt OAS and
(ii) the recognition in earnings of other-than-temporary
impairments related to these securities.

Interest
Rate and Other Market Risks

Our mortgage-related investments portfolio is a source of
liquidity and stability for the home mortgage finance system,
but also exposes us to interest rate risk and other market
risks. Prepayment risk arises from the uncertainty as to when
borrowers will pay the outstanding principal balance of mortgage
loans that we hold or that represent underlying collateral for
securities in our mortgage-related investments portfolio.
Unexpected mortgage prepayments result in a potential mismatch
in the timing of our receipt of cash flows related to such
assets versus the timing of payment of cash flows related to our
liabilities. As interest rates fluctuate, we use derivatives to
adjust the interest rate characteristics of our debt funding in
order to more closely match those of our assets.

The recent market environment has remained volatile. Throughout
2008 and into 2009, we adjusted our interest rate risk models to
reflect rapidly changing market conditions. In particular, these
models were adjusted during 2009 to reflect changes in
prepayment expectations resulting from the MHA Programs,
including mortgage refinancing expectations.

Operational
Risks

Operational risks are inherent in all of our business activities
and can become apparent in various ways, including accounting or
operational errors, business interruptions, fraud and failures
of the technology used to support our business activities. Our
risk of operational failure may be increased by vacancies in
officer and key business unit positions and failed or inadequate
internal controls. These operational risks may expose us to
financial loss, interfere with our ability to sustain timely
financial reporting, or result in other adverse consequences.

As a result of managements evaluation of our disclosure
controls and procedures, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were not effective as of September 30, 2009, at
a reasonable level of assurance. We continue to work to improve
our financial reporting governance process and remediate
material weaknesses and other deficiencies in our internal
controls. While we are making progress on our remediation plans,
our material weaknesses have not been fully remediated at this
time. After consideration of our mitigating activities,
including our remediation efforts through September 30,
2009, we believe that our interim consolidated financial
statements for the quarter ended September 30, 2009, have
been prepared in conformity with GAAP.

Adoption
of SFAS 166 and SFAS 167

Effective January 1, 2010, we will adopt: (i) the
amendment to the accounting standards for transfers of financial
assets (SFAS 166), which changes the accounting standards
on transfer and servicing of financial assets (FASB
ASC 860); and (ii) the amendment to the accounting
standards on consolidations (SFAS 167), which changes the
consolidation guidance related to variable interest entities. We
expect that the adoption of these two amendments will have a
significant impact on our consolidated financial statements.

Upon adoption of these standards, we will be required to
consolidate our single-family PC trusts and some of our
Structured Transactions in our financial statements, which could
have a significant negative impact on our net worth and could
result in additional draws under the Purchase Agreement.

The adoption of these two amendments would significantly
increase our required level of capital under existing regulatory
capital rules, which are not binding during conservatorship as
our Conservator has suspended regulatory capital classification
of us.

Implementation of these changes will require significant
operational and systems changes. It may be difficult for us to
make all such changes in a controlled manner by the effective
date.

Off-Balance
Sheet Arrangements

We enter into certain business arrangements that are not
recorded on our consolidated balance sheets or may be recorded
in amounts that differ from the full contract or notional amount
of the transaction. Most of these arrangements relate to our
financial guarantee and securitization activity for which we
record guarantee assets and obligations, but the related
securitized assets are owned by third parties. These off-balance
sheet arrangements may expose us to potential losses in excess
of the amounts recorded on our consolidated balance sheets.

Our maximum potential off-balance sheet exposure to credit
losses relating to our PCs, Structured Securities and other
mortgage-related guarantees is primarily represented by the
unpaid principal balance of the related loans and securities
held by third parties, which was $1,459 billion and
$1,403 billion at September 30, 2009 and
December 31, 2008, respectively. Based on our historical
credit losses, which in the third quarter of 2009 averaged
approximately 44.3 basis points of the aggregate unpaid
principal balance of our single-family mortgage portfolio, we do
not believe that the maximum exposure is representative of our
actual exposure on these guarantees.

Legislative
and Regulatory Matters

The following section discusses certain significant recent
developments with respect to legislative and regulatory matters.

Federal
Legislation and Related Matters

On June 17, 2009, the Obama Administration announced a
legislative proposal to overhaul the regulatory structure of the
financial services industry. The proposal includes draft bills
addressing resolution authority for systemically significant
institutions, consumer financial protection, securitization and
derivatives, among other subjects. If enacted, this proposal
would result in significant changes in the regulation of the
financial services industry, and would affect

the business and operations of Freddie Mac. However, we cannot
predict the impact of the proposal on our business and
operations, because Congress has not yet fully considered the
legislation.

The Obama Administrations proposal does not address the
regulatory oversight or structure of Freddie Mac. Under the
proposal, Treasury and HUD are expected to consult with other
government agencies and develop recommendations for the future
of Freddie Mac, Fannie Mae and the Federal Home Loan Bank
System. According to the proposal, Treasury and HUD will report
their recommendations to Congress and the general public at the
time of the Presidents 2011 budget release, which is
currently planned for February 2010.

Congress may consider separate legislation that could affect
Freddie Macs business and operations, such as legislation
allowing bankruptcy judges to modify the terms of mortgages on
principal residences for borrowers who file for bankruptcy under
Chapter 13 of the bankruptcy code.

Congress is considering legislative proposals regarding the
oversight of the derivatives market. These proposals would
generally extend Commodity Futures Trading Commission or SEC
regulatory oversight to certain financial derivatives, including
derivatives used by Freddie Mac to manage risk exposures. The
proposals would also impose new clearing and reporting
requirements, as well as new capital requirements for
derivatives dealers and counterparties. The Obama Administration
has proposed similar derivatives oversight legislation as part
of its proposed overhaul of the financial services regulatory
structure. If enacted, such legislation could significantly
impact Freddie Mac.

On June 26, 2009, the House of Representatives passed a
comprehensive energy bill that would, among other things,
require FHFA to provide Freddie Mac and Fannie Mae with
additional affordable housing goals credit for qualifying
purchases of certain energy-efficient and location-efficient
mortgages. The bill would also create a new duty to serve
underserved markets for energy-efficient and location-efficient
mortgages. In addition, the bill would create a new federal
energy loan guarantee program that would help homeowners finance
energy-efficient home improvements. The latter provision could
adversely impact Freddie Mac by potentially subordinating our
security interest in properties of borrowers who obtain such
loans. It is currently unclear when, or if, the Senate will
consider comparable legislation.

On July 16, 2009, the House of Representatives passed the
Financial Services and General Government appropriations bill
for fiscal year 2010. The House Committee on Appropriations
report accompanying the bill directs Treasury to report to the
Committee on its plans to ensure that taxpayers receive
repayment of their investment in Freddie Mac and Fannie Mae, as
well as companies that received funds from the Troubled Asset
Relief Program and other investments of taxpayer funds aimed at
ensuring economic and financial stability.

As part of the Economic Stimulus Act of 2008, the conforming
loan limits were temporarily increased for mortgages originated
in certain high-cost areas from July 1, 2007 through
December 31, 2008 to the higher of the applicable 2008
conforming loan limits, set at $417,000 for a mortgage secured
by a
one-unit
single-family residence, or 125% of the median house price for a
geographic area, not to exceed $729,750 for a
one-unit,
single-family residence.

The American Recovery and Reinvestment Act of 2009, or Recovery
Act, ensures that the loan limits for mortgages originated in
2009 in the high-cost areas determined under the Economic
Stimulus Act do not fall below their 2008 levels. On
October 30, 2009, President Obama signed a Continuing
Resolution extending funding for federal agencies through
December 18, 2009. The Continuing Resolution also includes
language extending the temporary high-cost conforming limits set
by the Recovery Act through December 2010.

On July 31, 2009, the House of Representatives passed a
bill that would require public companies to hold non-binding
shareholder votes on executive compensation and to take steps to
ensure that members of their compensation committees are
independent. The bill would also require specified financial
institutions, including Freddie Mac, to disclose incentive-based
compensation arrangements to regulators; and would permit
federal regulators to prohibit specified financial institutions,
including Freddie Mac, from using certain types of compensation
structures that the regulators determine encourage inappropriate
risks. It is currently unclear when, or if, the Senate will
consider comparable legislation.

On October 22, 2009, the House Financial Services Committee
approved the Consumer Financial Protection Act which would
create a new Consumer Financial Protection Agency responsible
for regulating covered institutions, including Freddie Mac. The
agency would have regulatory, examination and enforcement
authority over financial products and offerings that in many
instances would overlap with FHFAs authority. The bill
could impact the regulation of our business and impose
additional costs. On October 29, 2009, the House Energy and
Commerce Committee also marked up and voted to approve the bill.

Congress is also considering systemic risk and resolution
authority legislation. The proposal would address the regulation
and resolution authority for certain systemically significant
institutions. The bill could significantly change the regulation
of Freddie Mac.

Approximately fourteen states have enacted laws allowing
localities to create energy loan assessment programs for the
purpose of financing energy efficient home improvements. While
the specific terms may vary, these laws generally treat the new
energy assessments like property tax assessments and allow for
the creation of a new lien to secure the assessment that is
senior to any existing Freddie Mac mortgage lien. The Obama
Administration has expressed support for these laws. If numerous
localities adopt such programs and borrowers obtain this type of
financing, these laws could have a negative impact on Freddie
Macs credit losses.

Various states, cities, and counties implemented mediation
programs that could delay or otherwise change their foreclosure
processes. The processes, requirements, and duration of
mediation programs may vary for each state but are designed to
bring servicers and borrowers together to negotiate foreclosure
alternatives. These actions could increase our expenses,
including by potentially delaying the final resolution of
delinquent mortgage loans and the disposition of non-performing
assets.

Proposed
and Interim Final Regulations

On June 17, 2009, FHFA published a proposed rule that would
require Freddie Mac, Fannie Mae and the FHLBs to report to FHFA
any fraud or possible fraud relating to any loans or other
financial instruments that the entity has purchased or sold. The
proposed rule would implement the Reform Acts fraud
reporting provisions and would replace OFHEOs mortgage
fraud regulation.

On July 2, 2009, FHFA published an interim final rule on
prior approval of new products, implementing the new product
provisions for Freddie Mac and Fannie Mae in the Reform Act. The
rule establishes a process for Freddie Mac and Fannie Mae to
provide prior notice to the Director of FHFA of a new activity
and, if applicable, to obtain prior approval from the Director
if the new activity is determined to be a new product. Under the
rule, if the Director determines that a new activity of Freddie
Mac is a new product, a description of the new
product must be published for public comment, after which the
Director will approve the new product if the Director determines
that the new product is: (a) authorized by our charter;
(b) in the public interest; and (c) consistent with
the safety and soundness of Freddie Mac and the mortgage finance
and financial system. On August 31, 2009, Freddie Mac and
Fannie Mae filed joint public comments on the interim final rule
with FHFA. We cannot currently predict what changes, if any,
FHFA may make to the interim final rule in response to our
comments and consequently we are not able to predict the impact
of the interim final rule on our business or operations.
Depending on the manner in which the interim final rule is
implemented, this rule could have an adverse impact on our
ability to develop and introduce new products and activities to
the marketplace.

Affordable
Housing Goals

On July 30, 2009, FHFA issued a final rule that adjusts our
affordable housing goals and home purchase subgoals for 2009 to
the levels set forth in Table 4 below. Except for the
multifamily special affordable volume target, FHFA decreased all
of the goals and subgoals, as compared to those in effect for
2008.

Table
4  Housing Goals and Home Purchase Subgoals for 2008
and
2009(1)

Housing Goals

2009

2008

Low- and moderate-income goal

43

%

56

%

Underserved areas goal

32

39

Special affordable goal

18

27

Multifamily special affordable volume target (in billions)

$

4.60

$

3.92

Home Purchase Subgoals

2009

2008

Low- and moderate-income subgoal

40

%

47

%

Underserved areas subgoal

30

34

Special affordable subgoal

14

18

(1)

An individual mortgage may qualify for more than one of the
goals or subgoals. Each of the goal and subgoal percentages will
be determined independently and cannot be aggregated to
determine a percentage of total purchases that qualifies for
these goals or subgoals.

The final rule permits loans we own or guarantee that are
modified in accordance with the MHA Program to be treated as
mortgage purchases and count toward the housing goals. In
addition, the rule excludes from the 2009 housing goals loans
with original principal balances that exceed the base conforming
loan limits in certain high-cost areas as allowed by the
Recovery Act.

We expect that market conditions and the tightened credit and
underwriting environment will make achieving our affordable
housing goals and subgoals for 2009 challenging.

Effective beginning calendar year 2010, the Reform Act requires
that FHFA establish, by regulation, four single-family housing
goals and one multifamily special affordable housing goal. In
addition, the Reform Act establishes a duty for Freddie Mac and
Fannie Mae to serve three underserved markets, manufactured
housing, affordable housing preservation and rural areas, by
developing loan products and flexible underwriting guidelines to
facilitate a secondary market for mortgages for very low-,
low-and moderate-income families in those markets. Effective for
2010, FHFA is required to establish a manner for annually:
(1) evaluating whether and to what extent Freddie Mac and
Fannie Mae have complied with the duty to serve underserved
markets; and (2) rating the extent of compliance. On
August 4, 2009, FHFA released an advance notice of proposed
rulemaking regarding the duty of Freddie Mac and Fannie Mae to
serve the underserved markets. We provided comments on the
proposed rulemaking to FHFA, but we cannot predict the contents
of any proposed final rule that FHFA may release, or the impact
that the final rulemaking will have on our business or
operations.

New
York Stock Exchange Matters

On November 17, 2008, we received a notice from the NYSE
that we had failed to satisfy one of the NYSEs standards
for continued listing of our common stock. Specifically, the
NYSE advised us that we were below criteria for the
NYSEs price criteria for common stock because the average
closing price of our common stock over a consecutive 30
trading-day
period was less than $1 per share. On December 2, 2008, we
advised the NYSE of our intent to cure this deficiency, and that
we might undertake a reverse stock split in order to do so. We
did not undertake a reverse stock split or any other action to
cure this deficiency.

On September 3, 2009, the NYSE notified us that we had
returned to compliance with the NYSEs minimum share price
listing requirement, based on a review as of August 31,
2009 showing that our average share price over the preceding 30
trading days and our closing share price on that date were both
more than $1.

For the three and nine months ended September 30, 2009 and
2008, includes the weighted average number of shares that are
associated with the warrant for our common stock issued to
Treasury as part of the Purchase Agreement. This warrant is
included in basic loss per share for both the third quarter of
2009 and the third quarter of 2008, because it is
unconditionally exercisable by the holder at a cost of $.00001
per share.

Includes PCs and Structured Securities that are held in our
mortgage-related investments portfolio. See OUR
PORTFOLIOS  Table 57  Freddie
Macs Total Mortgage Portfolio and Segment Portfolio
Composition for the composition of our total mortgage
portfolio. Excludes Structured Securities for which we have
resecuritized our PCs and Structured Securities. These
resecuritized securities do not increase our credit-related
exposure and consist of single-class Structured Securities
backed by PCs, REMICs, and principal-only strips. The notional
balances of interest-only strips are excluded because this line
item is based on unpaid principal balance. Includes other
guarantees issued that are not in the form of a PC, such as
long-term standby commitments and credit enhancements for
multifamily housing revenue bonds.

(5)

The return on common equity ratio is not presented because the
simple average of the beginning and ending balances of Total
Freddie Mac stockholders equity (deficit), net of
preferred stock (at redemption value), is less than zero for all
periods presented. The dividend payout ratio on common stock is
not presented because we are reporting a net loss attributable
to common stockholders for all periods presented.

(6)

Ratio computed as annualized net income (loss) attributable to
Freddie Mac divided by the simple average of the beginning and
ending balances of total assets.

Ratio computed as the simple average of the beginning and ending
balances of Total Freddie Mac stockholders equity
(deficit) divided by the simple average of the beginning and
ending balances of total assets.

(9)

Ratio computed as preferred stock (excluding senior preferred
stock), at redemption value divided by core capital. Senior
preferred stock does not meet the statutory definition of core
capital. Ratio is not computed for periods in which core capital
is less than zero. See NOTE 9: REGULATORY
CAPITAL to our consolidated financial statements for more
information regarding core capital.

The following discussion of our consolidated results of
operations should be read in conjunction with our consolidated
financial statements including the accompanying notes. Also see
CRITICAL ACCOUNTING POLICIES AND ESTIMATES for more
information concerning our more significant accounting policies
and estimates applied in determining our reported financial
position and results of operations.

We adopted an amendment to the accounting standards for
investments in debt and equity securities effective
April 1, 2009. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES  Change in Accounting
Principles to our consolidated financial statements for
further information.

For securities, we calculated average balances based on their
unpaid principal balance plus their associated deferred fees and
costs (e.g., premiums and discounts), but excluded the
effect of
mark-to-fair-value
changes.

(3)

Non-performing loans, where interest income is recognized when
collected, are included in average balances.

(4)

Interest income (expense) includes the portion of impairment
charges recognized in earnings expected to be recovered.

(5)

Includes current portion of long-term debt.

(6)

Represents changes in fair value of derivatives in cash flow
hedge relationships that were previously deferred in AOCI and
have been reclassified to earnings as the associated hedged
forecasted issuance of debt and mortgage purchase transactions
affect earnings. 2008 also includes the accrual of periodic cash
settlements of all derivatives in qualifying hedge accounting
relationships.

(7)

The determination of net interest income/yield (fully
taxable-equivalent basis), which reflects fully
taxable-equivalent adjustments to interest income, involves the
conversion of tax-exempt sources of interest income to the
equivalent amounts of interest income that would be necessary to
derive the same net return if the investments had been subject
to income taxes using our federal statutory tax rate of 35%.

Net interest income and net interest yield on a fully
taxable-equivalent basis increased significantly during the
three and nine months ended September 30, 2009 compared to
the three and nine months ended September 30, 2008
primarily due to: (a) a decrease in funding costs as a
result of the replacement of higher cost short- and long-term
debt with new lower cost debt; (b) a significant increase
in the average size of our mortgage-related investments
portfolio, including an increase in our holdings of fixed-rate
assets; and (c) accretion of other-than-temporary
impairments of investments in available-for-sale securities;
partially offset by (d) the impact of declining short-term
interest rates on floating rate assets held in our
mortgage-related investments portfolio and cash and other
investments portfolio. Net interest income and net interest
yield during the three and nine months ended September 30,
2009 also benefited from the funds we received from Treasury
under the Purchase Agreement. These funds generate net interest
income, because the costs of such funds are not reflected in
interest expense, but instead as dividends paid on senior
preferred stock.

During the nine months ended September 30, 2009, spreads on
our debt improved and our access to the debt markets increased,
primarily due to the Federal Reserves purchases in the
secondary market of our long-term debt under its purchase
program. As a result, we were able to replace some higher cost
short- and long-term debt with new lower cost floating-rate
long-term debt and short-term debt, resulting in a decrease in
our funding costs. Consequently, our concentrations of floating
rate debt returned to more historical levels as of
September 30, 2009. Due to our limited ability to issue
long-term and callable debt during the second half of 2008 and
the first few months of 2009, we increased our use of the
strategy of combining derivatives and floating-rate long-term
debt or short-term debt to synthetically create the substantive
economic equivalent of various longer-term fixed rate debt
funding structures. See Non-Interest Income
(Loss)  Derivative Overview for
additional information.

The increase in the average balance of our mortgage-related
investments portfolio during the 2009 periods resulted from our
acquiring and holding increased amounts of mortgage loans and
mortgage-related securities to provide additional liquidity to
the mortgage market. Also, primarily during the first quarter of
2009, continued liquidity concerns in the market caused spreads
to widen resulting in more favorable investment opportunities
for agency mortgage-related securities. In response, our
purchase activities increased, resulting in an increase in the
average balance of our interest-earning assets. However, during
the third quarter of 2009, the unpaid principal balance of our
mortgage-related investments portfolio declined due to tightened
spreads which we believe resulted from the Federal Reserve and
Treasury actively purchasing agency mortgage-related securities
in the secondary market which made investment opportunities less
favorable. For information on the potential impact of
(i) the termination of these purchase programs and
(ii) the requirement to reduce the mortgage-related
investments portfolio by 10% annually, beginning in 2010, see
CONSOLIDATED BALANCE SHEETS ANALYSIS 
Mortgage-Related Investments Portfolio and LIQUIDITY
AND CAPITAL RESOURCES  Liquidity.

Net interest income also included $1.1 billion of income
during the nine months ended September 30, 2009, primarily
recognized in the first quarter of 2009, compared to
$81 million of income during the nine months ended
September 30, 2008, recognized in the third quarter of
2008, related to the accretion of other-than-temporary
impairments of investments in available-for-sale securities.
Upon our adoption of an amendment to the accounting standards
for investments in debt and equity securities (FASB
ASC 320-10-65-1)
on April 1, 2009, previously recognized non-credit-related
other-than-temporary impairments were reclassified from retained
earnings to AOCI and these amounts are no longer accreted into
net interest income. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES to our consolidated
financial statements for a discussion of the impact of these
accounting changes.

The increases in net interest income and net interest yield on a
fully taxable-equivalent basis during the three and nine months
ended September 30, 2009 were partially offset by the
impact of declining short-term interest rates on floating rate
assets held in our mortgage-related investments portfolio. We
also increased our cash and other investments portfolio during
the three and nine months ended September 30, 2009 compared
to the three and nine months ended September 30, 2008, as
we replaced higher-yielding, longer-term non-mortgage-related
securities with lower-yielding, shorter-term cash and cash
equivalents, Treasury bills and securities purchased under
agreements to resell. This shift, in combination with lower
short-term rates, also partially offset the increase in net
interest income and net interest yield.

We expect net interest income may be negatively impacted in
future periods by: (a) the required decreases in our
mortgage-related investments portfolio balance, through
successive annual 10% reductions commencing in 2010 until it
reaches $250 billion, which will cause a reduction in our
interest-earning assets; and (b) the termination of the
Federal Reserves program to purchase our debt securities,
which may increase our funding costs.

Table 7 provides summary information about management and
guarantee income. Management and guarantee income consists of
contractual amounts due to us (reflecting buy-ups and buy-downs
to base management and guarantee fees) as well as amortization
of pre-2003
delivery and buy-down fees received by us that were recorded as
deferred income as a component of other liabilities. Beginning
in 2003, delivery and buy-down fees are reflected within income
on guarantee obligation as the guarantee obligation is amortized.

Table 7 
Management and Guarantee Income

Three Months Ended September 30,

Nine Months Ended September 30,

2009

2008

2009

2008

Amount

Rate

Amount

Rate

Amount

Rate

Amount

Rate

(dollars in millions, rates in basis points)

Contractual management and guarantee
fees(1)

$

765

16.8

$

796

17.6

$

2,323

17.2

$

2,331

17.5

Amortization of deferred fees included in other liabilities

35

0.8

36

0.8

(33

)

(0.3

)

47

0.4

Total management and guarantee income

$

800

17.6

$

832

18.4

$

2,290

16.9

$

2,378

17.9

Unamortized balance of deferred fees included in other
liabilities, at period end

$

218

$

371

$

218

$

371

(1)

Consists of management and guarantee fees related to all issued
and outstanding guarantees, including those issued prior to
adoption of the accounting standard for guarantees
(FASB ASC 460-10)
in January 2003, which did not require the establishment of a
guarantee asset.

Management and guarantee income decreased slightly for the three
and nine months ended September 30, 2009 compared to the
three and nine months ended September 30, 2008. For the
nine months ended September 30, 2009, the decrease in
management and guarantee income compared to the nine months
ended September 30, 2008 is primarily due to the reversal
of amortization of
pre-2003
deferred fees in the first and second quarter of 2009.
Amortization of deferred fees declined due to our expectations
of increasing interest rates and slowing prepayments in the
future, which resulted in our recognizing a
catch-up, or
reversal, of previous amortization in the nine months ended
September 30, 2009. The unpaid principal balance of our
issued PCs and Structured Securities was $1.86 trillion at
September 30, 2009 compared to $1.83 trillion at
September 30, 2008, an increase of 2%. Although there were
higher average balances of our issued guarantees during the
three and nine months ended September 30, 2009, compared to
the same periods in 2008, the effect of this increase was offset
by declines in the average rate of contractual management and
guarantee fees. Our average management and guarantee fee rates
declined in the three and nine months ended September 30,
2009, compared to the same periods in 2008, due primarily to
portfolio turnover in these periods, since newly issued PCs
generally had lower average contractual guarantee fee rates than
the previously outstanding PCs that were liquidated. This rate
decline was also caused by the impact of market-adjusted pricing
on new business purchases and an increase in the composition of
30-year
fixed-rate amortizing mortgages within our new PC issuances
during 2009 (for which we receive a lower fee).

We implemented additional delivery fee increases effective
September 1, 2009 and October 1, 2009, for mortgages
with certain combinations of LTV ratios and other higher-risk
loan characteristics. Although we increased delivery fees during
2009, we have been experiencing competitive pressure on our
contractual management and guarantee rates, which limited our
ability to increase our rates as customers renew their
contracts. Due to these competitive pressures, we do not have
the ability to raise our contractual guarantee and management
rates to offset the increased provision for credit losses on
existing business.

Gains
(Losses) on Guarantee Asset

Upon issuance of a financial guarantee, we record a guarantee
asset on our consolidated balance sheets representing the fair
value of the management and guarantee fees we expect to receive
over the life of our PCs and Structured Securities. Subsequent
changes in the fair value of the future cash flows of our
guarantee asset are reported in the current period income as
gains (losses) on guarantee asset.

Gains (losses) on guarantee asset reflect:



reductions related to the management and guarantee fees received
that are considered a return of our recorded investment in our
guarantee asset; and



changes in the fair value of management and guarantee fees we
expect to receive over the life of the financial guarantee.

Contractual management and guarantee fees shown in Table 8
represent cash received in each period for those financial
guarantees with an established guarantee asset. A portion of
these contractual management and guarantee fees is attributed to
imputed interest income on the guarantee asset.

Table 8 
Attribution of Change  Gains (Losses) on Guarantee
Asset

Three Months Ended

Nine Months Ended

September 30,

September 30,

2009

2008

2009

2008

(in millions)

Contractual management and guarantee fees

$

(729

)

$

(730

)

$

(2,193

)

$

(2,139

)

Portion attributable to imputed interest income

235

299

735

757

Return of investment on guarantee asset

(494

)

(431

)

(1,458

)

(1,382

)

Change in fair value of future management and guarantee fees

1,074

(1,291

)

3,699

(620

)

Gains (losses) on guarantee asset

$

580

$

(1,722

)

$

2,241

$

(2,002

)

Contractual management and guarantee fees increased slightly in
the nine months ended September 30, 2009 as compared to the
nine months ended September 30, 2008, primarily due to
increases in the average balance of our PCs and Structured
Securities issued.

As shown in the table above, the change in fair value of future
management and guarantee fees was $1.1 billion in the third
quarter of 2009 compared to $(1.3) billion in the third
quarter of 2008 and was $3.7 billion and
$(0.6) billion for the nine months ended September 30,
2009 and 2008, respectively. The increases in the fair value
gain on our guarantee asset in the 2009 periods were principally
attributed to a greater increase in the valuations of
excess-servicing, interest-only mortgage securities (which we
use to estimate the value of our guarantee asset) during these
periods, as compared to the decrease in the valuations during
the corresponding periods of 2008.

Income
on Guarantee Obligation

Upon issuance of our guarantee, we record a guarantee obligation
on our consolidated balance sheets representing the estimated
fair value of our obligation to perform under the terms of the
guarantee. Our guarantee obligation is amortized into income
using a static effective yield determined at inception of the
guarantee based on forecasted repayments of the principal
balances on loans underlying the guarantee. See CRITICAL
ACCOUNTING POLICIES AND ESTIMATES  Application of the
Static Effective Yield Method to Amortize the Guarantee
Obligation in our 2008 Annual Report for additional
information on application of the static effective yield method.
The static effective yield is periodically evaluated and
amortization is adjusted when significant changes in economic
events cause a shift in the pattern of our economic release from
risk. When this type of change is required, a cumulative
catch-up adjustment, which could be significant in a given
period, will be recognized. In the first quarter of 2009, we
enhanced our methodology for evaluating significant changes in
economic events to be more in line with the current economic
environment and to monitor the rate of amortization on our
guarantee obligation so that it remains reflective of our
expected duration of losses.

Table 9 provides information about the components of income
on guarantee obligation.

Table 9 
Income on Guarantee Obligation

Three Months Ended

Nine Months Ended

September 30,

September 30,

2009

2008

2009

2008

(in millions)

Static effective yield amortization:

Basic

$

692

$

679

$

2,208

$

1,940

Cumulative catch-up

122

104

477

781

Total income on guarantee obligation

$

814

$

783

$

2,685

$

2,721

Basic amortization under the static effective yield method
increased in both the three and nine months ended
September 30, 2009, compared to the same periods in 2008,
due to growth in the balance of our issued PCs and Structured
Securities. Higher prepayment rates on the related loans, which
was attributed to higher refinance activity during the 2009
periods, also resulted in increased basic amortization in the
2009 periods, compared to the 2008 periods.

Cumulative
catch-up
amortization was higher for the third quarter of 2009 than in
the third quarter of 2008 principally due to higher prepayment
rates experienced in the third quarter of 2009, resulting from
higher refinance activity. We recognized higher cumulative
catch-up adjustments in the nine months ended September 30,
2008 than in the nine months ended September 30, 2009 due
to the significant declines in home prices that occurred during
the nine months ended September 30, 2008. We estimate that
home prices increased by approximately 0.9% during the nine

months ended September 30, 2009, based on our own index of
our single-family mortgage portfolio, compared to an estimated
decrease of 5.5% during the nine months ended September 30,
2008.

Derivative
Overview

Table 10 presents the gains and losses related to
derivatives that were not accounted for in hedge accounting
relationships. Derivative gains (losses) represents the change
in fair value of derivatives not accounted for in hedge
accounting relationships because the derivatives did not qualify
for, or we did not elect to pursue, hedge accounting, resulting
in fair value changes being recorded to earnings. At
September 30, 2009, we did not have any derivatives in
hedge accounting relationships. Derivative gains (losses) also
includes the accrual of periodic settlements for derivatives
that are not in hedge accounting relationships. Although
derivatives are an important aspect of our management of
interest rate risk, they generally increase the volatility of
reported net income (loss), particularly when they are not
accounted for in hedge accounting relationships. Our use of
derivatives also exposes us to counterparty credit risk. For a
discussion of the impact of derivatives on our consolidated
financial statements and our discontinuation in 2008 of hedge
accounting for derivatives previously designated as cash flow
hedges, see NOTE 10: DERIVATIVES to our
consolidated financial statements.

See NOTE 10: DERIVATIVES to our consolidated
financial statements for additional information about the
purpose of entering into derivatives not designated as hedging
instruments and our overall risk management strategies.

(3)

Primarily represents purchased interest rate caps and floors,
purchased put options on agency mortgage-related securities, as
well as certain written options, including guarantees of stated
final maturity of issued Structured Securities and written call
options on agency mortgage-related securities.

(4)

Foreign-currency swaps are defined as swaps in which the net
settlement is based on one leg calculated in a foreign-currency
and the other leg calculated in U.S. dollars.

(5)

Related to the bankruptcy of Lehman Brothers Holdings, Inc.
for both the three and nine months ended September 30, 2008.

(6)

Includes imputed interest on zero-coupon swaps.

Gains (losses) on derivatives not accounted for in hedge
accounting relationships are principally driven by changes in
(i) swap interest rates and implied volatility and
(ii) the mix and volume of derivatives in our derivatives
portfolio. We use receive- and pay-fixed interest rate swaps to
adjust the interest-rate characteristics of our debt funding in
order to more closely match changes in the interest-rate
characteristics of our mortgage-related assets. Our mix and
volume

of derivatives change period to period as we respond to changing
interest rate environments. We also use derivatives to
synthetically create the substantive economic equivalent of
various debt funding structures. For example, the combination of
a series of short-term debt issuances over a defined period and
a pay-fixed interest rate swap with the same maturity as the
last debt issuance is the substantive economic equivalent of a
long-term fixed-rate debt instrument of comparable maturity.
However, the use of these derivatives may expose us to
additional counterparty credit risk. Due to limits on our
ability to issue long-term and callable debt in the second half
of 2008 and the first few months of 2009, we pursued this
strategy and thus increased our use of pay-fixed interest rate
swaps. Additionally, we use swaptions and other option-based
derivatives to adjust the characteristics of our debt in
response to changes in the expected lives of mortgage-related
assets in our mortgage-related investments portfolio. For a
discussion regarding our ability to issue debt, see
LIQUIDITY AND CAPITAL RESOURCES 
Liquidity  Debt Securities.

During the three months ended September 30, 2009, swap
interest rates and implied volatility both declined, resulting
in a loss on derivatives of $3.8 billion. During this
period, the declining swap interest rates resulted in fair value
losses on our pay-fixed interest rate swaps of
$8.2 billion, partially offset by gains on our
receive-fixed interest rate swaps of $4.5 billion. The
decline in swap interest rates more than offset the decrease in
implied volatility, resulting in gains of $2.3 billion on
our purchased call swaptions.

During the three months ended September 30, 2008,
longer-term swap interest rates declined and implied volatility
increased, resulting in a loss on derivatives of
$3.1 billion. During this period, the decrease in
longer-term interest rates resulted in fair value losses on our
pay-fixed swaps of $5.3 billion, partially offset by gains
on our receive-fixed swaps of $2.3 billion. The decrease in
longer-term swap interest rates and an increase in implied
volatility contributed to gains of $1.8 billion on our
purchased call swaptions for this period.

During the nine months ended September 30, 2009, the mix
and volume of our derivative portfolio were impacted by
fluctuations in swap interest rates resulting in a loss on
derivatives of $1.2 billion. While swap interest rates
declined over the three months ended September 30, 2009,
longer-term swap interest rates and implied volatility both
increased during the nine months ended September 30, 2009.
As a result of these factors, we recorded gains on our pay-fixed
swap positions, partially offset by losses on our receive-fixed
swaps. We also recorded losses on our purchased call swaptions,
as the impact of the increasing swap interest rates more than
offset the impact of higher implied volatility.

During the nine months ended September 30, 2008, swap
interest rates declined, while implied volatility increased,
resulting in a loss on derivatives of $3.2 billion. During
the period, these changes resulted in a loss on our pay-fixed
swap positions, partially offset by gains on our receive-fixed
swaps and a gain on our purchased call swaptions.

As a result of our election of the fair value option for our
foreign-currency denominated debt, foreign-currency translation
gains and losses and fair value adjustments related to our
foreign-currency denominated debt are recognized on our
consolidated statements of operations as gains (losses) on debt
recorded at fair value. Due to this election, we can better
reflect in earnings the economic offset that exists between
certain derivative instruments and our foreign-currency
denominated debt. We use a combination of foreign-currency swaps
and foreign-currency denominated receive-fixed interest rate
swaps to manage the risks of changes in fair value of our
foreign-currency denominated debt related to fluctuations in
exchange rates and interest rates, respectively. As illustrated
below:



fair value gains (losses) related to translation, which is a
component of gains (losses) on debt recorded at fair value, is
partially offset by derivative gains (losses) on
foreign-currency swaps; and



gains (losses) relating to interest rate and instrument-specific
credit risk adjustments, which is also a component of gains
(losses) on debt recorded at fair value, is partially offset by
derivative gains (losses) on foreign-currency denominated
receive-fixed interest rate swaps.

For the three and nine months ended September 30, 2009, we
recognized fair value gains (losses) of $(239) million and
$(569) million, respectively, on our foreign-currency
denominated debt. These amounts included:



fair value gains (losses) related to translation of
$(240) million and $(316) million, respectively, which
were partially offset by derivative gains (losses) on
foreign-currency swaps of $238 million and
$248 million, respectively; and

For the three and nine months ended September 30, 2008, we
recognized fair value gains (losses) of $1.5 billion and
$684 million, respectively, on our foreign-currency
denominated debt. These amounts included:



fair value gains (losses) related to translation of
$1.7 billion and $539 million, respectively, which
were partially offset by derivative gains (losses) on
foreign-currency swaps of $(1.6) billion and
$(389) million, respectively; and

Gains (losses) on investments include gains and losses on
certain assets where changes in fair value are recognized
through earnings, gains and losses related to sales, impairments
and other valuation adjustments. Table 11 summarizes the
components of gains (losses) on investments.

Table 11 
Gains (Losses) on Investments

Three Months Ended

Nine Months Ended

September 30,

September 30,

2009

2008

2009

2008

(in millions)

Impairment-related(1):

Total other-than-temporary impairment of
available-for-sale
securities

We adopted an amendment to the accounting standards for
investments in debt and equity securities effective
April 1, 2009. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES  Change in Accounting
Principles to our consolidated financial statements for
further information.

(2)

Includes mark-to-fair value adjustments on securities classified
as trading recorded in accordance with accounting guidance for
investments in beneficial interests for securitized assets
(FASB ASC 325-40).

(3)

Represents gains (losses) on mortgage loans sold in connection
with securitization transactions.

Impairments
on
Available-For-Sale
Securities

During the third quarter of 2009, we recorded total
other-than-temporary
impairment related to our
available-for-sale
securities of $4.2 billion, of which $1.2 billion was
recognized in earnings and $3.0 billion was recognized in
AOCI. We adopted an amendment to the accounting standards for
investments in debt and equity securities on April 1, 2009,
which provides guidance designed to create greater clarity and
consistency in accounting for and presenting impairment losses
on debt securities. Under this guidance, the non-credit-related
portion of the
other-than-temporary
impairment (that portion which relates to securities not
intended to be sold or which it is not more likely than not we
will be required to sell) is recorded in AOCI and not recognized
in earnings. Credit-related portions of other-than-temporary
impairments are recognized in earnings. See NOTE 4:
INVESTMENTS IN SECURITIES to our consolidated financial
statements for additional information regarding these accounting
principles and other-than-temporary impairments recorded during
the three and nine months ended September 30, 2009 and
2008. See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  Change in Accounting Principles 
Change in the Impairment Model for Debt Securities
to our consolidated financial statements for information on how
other-than-temporary impairments are recorded on our financial
statements commencing in the second quarter of 2009.

We recognized net gains on trading securities of
$2.2 billion and $5.0 billion for the three and nine
months ended September 30, 2009, respectively, as compared
to net losses of $(0.9) billion and $(2.2) billion for
the three and nine months ended September 30, 2008,
respectively. The unpaid principal balance of our securities
classified as trading

increased to $222 billion at September 30, 2009
compared to $116 billion at September 30, 2008,
primarily due to our increased purchases of agency
mortgage-related securities. The increased balance in our
trading portfolio, combined with lower interest rates and, to a
lesser degree, tightening OAS levels, contributed
$2.0 billion and $3.5 billion to the gains on these
trading securities for the three and nine months ended
September 30, 2009, respectively. In addition, during the
three and nine months ended September 30, 2009, we sold
agency securities classified as trading with unpaid principal
balances of approximately $48 billion and
$135 billion, respectively, which generated realized gains
of $213 million and $1.5 billion, respectively.

We recognized net losses on trading securities for the three
months ended September 30, 2008, due to sales of agency
securities classified as trading with unpaid principal balances
of $58 billion, which generated a realized loss of
$547 million. Wider spreads also contributed to the net
losses on trading securities for the three and nine months ended
September 30, 2008.

Gains
(Losses) on Sale of Available-For-Sale Securities

We recorded net gains on the sale of available-for-sale
securities of $473 million for the third quarter of 2009
compared to $287 million for the third quarter of 2008.
During the third quarter of 2009, we sold agency
mortgage-related securities with unpaid principal balances of
approximately $8.2 billion, which generated a net gain of
$391 million. The remainder of the gains during the third
quarter, $83 million, was due to the sale of asset-backed
securities from our cash and other investments portfolio with
unpaid principal balances of $1.0 billion. During the third
quarter of 2008, primarily prior to conservatorship, we sold
securities with unpaid principal balances of $14.8 billion,
primarily consisting of agency mortgage-related securities,
which generated a net gain of $287 million.

We recorded net gains on the sale of
available-for-sale
securities of $729 million and $540 million for the
nine months ended September 30, 2009 and 2008,
respectively. During 2009, we sold agency mortgage-related
securities with unpaid principal balances of approximately
$14.1 billion, which generated a net gain of
$582 million. In addition, during the nine months ended
September 30, 2009, we recorded gains of $152 million
due to the sale of asset-backed securities from our cash and
other investments portfolio with unpaid principal balances of
$2.1 billion. During the nine months ended
September 30, 2008, we sold securities with unpaid
principal balances of $35 billion, primarily consisting of
agency mortgage-related securities, which generated a net gain
of $538 million. These sales occurred principally during
the earlier months of the first quarter and prior to
conservatorship during the third quarter of 2008 when market
conditions were favorable and were driven in part by our need to
maintain our then-effective mandatory target capital surplus
requirement. We were not required to sell these securities in
either nine month period.

Lower
of Cost or Fair Value Adjustments

We recognized lower of cost or fair value adjustments of
$360 million and $591 million for the three and nine
months ended September 30, 2009, respectively, as compared
to $20 million and $28 million during the three and
nine months ended September 30, 2008, respectively. We
record single-family mortgage loans classified as held-for-sale
at the lower of amortized cost or fair value, which is evaluated
each period by aggregating loans based on the mortgage product
type. During the three and nine months ended September 30,
2009, we transferred, $9.7 billion of single-family
mortgage loans from held-for-sale to held-for-investment. The
majority of these loans were originally purchased with the
expectation of subsequent sale in a PC auction, but we now
expect to hold these in our mortgage-related investments
portfolio. Upon transfer, we evaluate the lower of cost or fair
value for each individual loan. We recognized approximately
$400 million of losses associated with these transfers
during the third quarter of 2009, representing the unrealized
losses of certain loans on the dates of transfer; however, we
are not permitted to similarly recognize any unrealized gains on
individual loans at the time of transfer. Losses associated with
transfer during the third quarter of 2009 were partially offset
by recoveries of previous fair value adjustments. We did not
transfer any mortgage loans between these categories during the
nine months ended September 30, 2008.

Gains
(Losses) on Debt Recorded at Fair Value

We elected the fair value option for our foreign-currency
denominated debt effective January 1, 2008. Accordingly,
foreign-currency translation exposure is a component of gains
(losses) on debt recorded at fair value. We manage the exposure
associated with our foreign-currency denominated debt related to
fluctuations in exchange rates and interest rates through the
use of derivatives, and changes in the fair value of such
derivatives are recorded as derivative gains (losses) in our
consolidated statements of operations. For the three and nine
months ended September 30, 2009, we recognized fair value
gains (losses) on our debt recorded at fair value of
$(238) million and $(568) million, respectively, due
primarily to the impact on our foreign-currency denominated debt
of the U.S. dollar weakening relative to the Euro. For the
three and nine months ended September 30, 2008, we
recognized fair value gains of $1.5 billion and
$684 million on our foreign-currency denominated debt,
respectively, primarily due to the

U.S. dollar strengthening relative to the Euro. See
Derivative Overview for additional
information about how we mitigate changes in the fair value of
our foreign-currency denominated debt by using derivatives.

Gains
(Losses) on Debt Retirement

Gains (losses) on debt retirement were $(215) million and
$(475) million during the three and nine months ended
September 30, 2009, respectively, compared to
$36 million and $312 million for the three and nine
months ended September 30, 2008, respectively. The losses
for the 2009 periods were due in part to losses related to debt
repurchases pursuant to tender offers we conducted in 2009,
including a loss of $184 million for the three months ended
September 30, 2009 related to our July 2009 tender offer
for our subordinated debt securities. For more information, see
LIQUIDITY AND CAPITAL RESOURCES 
Liquidity  Debt Securities  Debt
Retirement Activities. Also contributing to the
increased losses was a decreased level of call activity
involving our debt with coupon levels that increase at
pre-determined intervals. During the nine months ended
September 30, 2008, we recognized gains due to the
increased level of call activity, primarily involving our debt
with coupon levels that increase at pre-determined intervals,
which led to gains upon retirement and write-offs of previously
recorded interest expense.

Recoveries
on Loans Impaired Upon Purchase

Recoveries on loans impaired upon purchase represent the
recapture into income of previously recognized losses on loans
purchased and provision for credit losses associated with
purchases of delinquent loans under our financial guarantee.
Recoveries occur when a non-performing loan is repaid in full or
when at the time of foreclosure the estimated fair value of the
acquired property, less costs to sell, exceeds the carrying
value of the loan. For impaired loans where the borrower has
made required payments that return the loan to less than
90 days delinquent, the recovery amounts are instead
accreted into interest income over time as periodic payments are
received.

During the three months ended September 30, 2009 and 2008,
we recognized recoveries on loans impaired upon purchase of
$109 million and $91 million, respectively. For the
nine months ended September 30, 2009 and 2008, our
recoveries were $229 million and $438 million,
respectively. Our recoveries on impaired loans decreased in the
nine months ended September 30, 2009 due to a lower rate of
loan payoffs and a higher proportion of modified loans among
those loans purchased, as compared to the same periods in 2008.
In general, home prices in states having the greatest
concentration of our impaired loans have remained weak during
2009, which limited our recoveries on foreclosure transfers.

Low-Income
Housing Tax Credit Partnerships

We record the combination of our share of partnership losses and
any impairment of our net investment in LIHTC partnerships as
LIHTC expense on our consolidated statements of operations.
LIHTC partnership expenses totaled $479 million and
$121 million during the third quarters of 2009 and 2008,
respectively, and totaled $752 million and
$346 million in the nine months ended September 30,
2009 and 2008, respectively. The increase of LIHTC partnership
expenses in both 2009 periods, as compared to 2008 periods, is
due to the recognition of impairment on a portion of our
investment in certain LIHTC partnerships during the third
quarter of 2009, reflecting a decline in value as a result of
the economic recession. We recognized $370 million and
$379 million of
other-than-temporary
impairment on LIHTC partnership investments during the three and
nine months ended September 30, 2009, respectively, related
to 143 partnerships in which we have investments. We
recognized $10 million of other-than-temporary impairment
on these assets in the nine months ended September 30,
2008. We have not sold any of our LIHTC partnership investments
during the nine months ended September 30, 2009. As of the
third quarter of 2009, we have concluded that it is now probable
that our ability to realize the carrying value in our LIHTC
investments is limited to our ability to execute sales or other
transactions related to our partnership interests. This
determination is based upon a number of factors including our
inability to date to finalize an alternative transaction that
would allow us to monetize our LIHTC investments and continued
uncertainty in our future business structure and our ability to
generate sufficient taxable income to utilize the tax credits.
As a result, we have determined that individual partnerships
whose carrying value exceeds fair value are other than
temporarily impaired and should be written down to their fair
value. Fair value is determined based on reference to market
transactions, however, there can be no assurance that we will be
able to access these markets. If we are not able to execute
sales or other transactions in order to realize the benefits of
these investments or do not receive regulatory approval for such
transactions, we may record significant other-than-temporary
impairment of our LIHTC partnership investments in the future.
Our total investments in LIHTC partnerships totaled
$3.4 billion as of September 30, 2009.

Trust
Management Income (Expense)

Trust management income (expense) represents the amounts we
earn as administrator, issuer and trustee, net of related
expenses, related to the management of remittances of principal
and interest on loans underlying our PCs and

Structured Securities. Trust management income (expense) was
$(155) million and $4 million for the
three months ended September 30, 2009 and 2008,
respectively, and $(600) million and $(12) million for
the nine months ended September 30, 2009 and 2008,
respectively. During the three and nine months ended
September 30, 2009, we experienced trust management
expenses associated with shortfalls in interest payments on PCs,
known as compensating interest, which significantly exceeded our
trust management income. The increase in expense for these
shortfalls was attributable to significantly higher refinance
activity and lower interest income on trust assets, which we
receive as fee income, in the 2009 periods, as compared to the
same periods in 2008. See MD&A 
CONSOLIDATED RESULTS OF OPERATIONS  Segment
Earnings  Results  Single-Family
Guarantee in our 2008 Annual Report for further
information on compensating interest.

Non-Interest
Expense

Table 12 summarizes the components of non-interest expense.

Table 12 
Non-Interest Expense

Three Months Ended

Nine Months Ended

September 30,

September 30,

2009

2008

2009

2008

(in millions)

Administrative expenses:

Salaries and employee benefits

$

230

$

133

$

658

$

605

Professional services

91

61

215

188

Occupancy expense

16

16

49

49

Other administrative expenses

96

98

266

267

Total administrative expenses

433

308

1,188

1,109

Provision for credit losses

7,577

5,702

21,567

9,479

REO operations (income) expense

(96

)

333

219

806

Losses on loans purchased

531

252

3,742

423

Securities administrator loss on investment activity



1,082



1,082

Other expenses

97

89

272

284

Total non-interest expense

$

8,542

$

7,766

$

26,988

$

13,183

Administrative
Expenses

Administrative expenses increased slightly for the nine months
ended September 30, 2009, compared to the nine months ended
September 30, 2008, in part due to higher professional
services costs to support corporate initiatives. The increase in
salaries and benefits expense for the three months ended
September 30, 2009, compared to the third quarter of 2008,
reflected a partial reversal of short-term performance
compensation that we recognized in the third quarter of 2008
that related to the first half of 2008.

Provision
for Credit Losses

Our reserves for mortgage loan and guarantee losses reflect our
best projection of defaults we believe are likely as a result of
loss events that have occurred through September 30, 2009.
The substantial weakness in the national housing market, the
uncertainty in other macroeconomic factors, such as trends in
unemployment rates and home prices, and the uncertainty of the
effect of current or any future government actions to address
the economic and housing crisis makes forecasting of default
rates imprecise. Our reserves also include the impact of our
projections of the results of strategic loss mitigation
initiatives, including our temporary suspensions of certain
foreclosure transfers, a higher volume of loan modifications,
and projections of recoveries through repurchases by
seller/servicers of defaulted loans due to failure to follow
contractual underwriting requirements at the time of the loan
origination. An inability to realize the benefits of our loss
mitigation plans, a lower realized rate of seller/servicer
repurchases or default rates that exceed our current projections
would cause our losses to be significantly higher than those
currently estimated.

The provision for credit losses was $7.6 billion and
$21.6 billion in the three and nine months ended
September 30, 2009, respectively, compared to
$5.7 billion and $9.5 billion in the three and nine
months ended September 30, 2008, respectively, as continued
weakness in the housing market and a rise in unemployment
affected our single-family mortgage portfolio. The provision for
credit losses for the nine months ended September 30, 2009
was also affected by observed changes in economic drivers
impacting borrower behavior and delinquency trends for certain
loans during the third quarter and a change in our methodology
for estimating loan loss reserves in the second quarter of 2009.
For more information on how we derive our estimate for the
provision for credit losses and these changes, see
NOTE 5: MORTGAGE LOANS AND LOAN LOSS RESERVES
to our consolidated financial statements. See EXECUTIVE
SUMMARY  Table 2  Credit Statistics,
Single-Family Mortgage Portfolio for quarterly trends in
our other credit-related statistics.

In the three and nine months ended September 30, 2009, we
recorded a $4.4 billion and $14.0 billion increase,
respectively, in our loan loss reserve, which is a combined
reserve for credit losses on loans within our mortgage-related
investments portfolio and mortgages underlying our PCs,
Structured Securities and other mortgage-related guarantees.
This resulted in a total loan loss reserve balance of
$29.6 billion at September 30, 2009.

The primary drivers of these increases are outlined below:



increased estimates of incurred losses on single-family mortgage
loans that are expected to experience higher default rates. In
particular, our estimates of incurred losses are higher for
single-family loans we purchased or guaranteed during 2006, 2007
and to a lesser extent 2005 and 2008. We expect such loans to
continue experiencing higher default rates than loans originated
in earlier years. We purchased a greater percentage of
higher-risk loans in 2005 through 2008, such as
Alt-A,
interest-only and other such products, and these mortgages have
performed particularly poorly during the current housing and
economic downturn;



a significant increase in the size of the non-performing
single-family loan portfolio for which we maintain loan loss
reserves. This increase is primarily due to deteriorating market
conditions and initiatives to prevent or avoid foreclosures. Our
single-family non-performing assets increased to
$91.6 billion at September 30, 2009, compared to
$48.0 billion and $35.5 billion at December 31,
2008 and September 30, 2008, respectively;



an observed trend of increasing delinquency rates and
foreclosure timeframes. We experienced more significant
increases in delinquency rates concentrated in certain regions
and states within the U.S. that have been most affected by home
price declines, as well as loans with second lien, third-party
financing. For example, as of September 30, 2009, at least
14% of loans in our single-family mortgage portfolio had second
lien, third-party financing at the time of origination and we
estimate that these loans comprise 22% of our delinquent loans,
based on unpaid principal balances;



with respect to the nine months ended September 30, 2009,
increases in the estimated average loss per loan, or severity of
losses, net of expected recoveries from credit enhancements,
driven in part by declines in home sales and home prices in the
last two years. The states with the largest declines in home
prices in the last two years and highest severity of losses
include California, Florida, Nevada and Arizona; and



increased amounts of delinquent interest associated with past
due loans, including those where the borrower is completing the
trial period under HAMP. A portion of our provision relates to
interest income due to PC investors each month that a loan
remains delinquent and remains in the PC pool.

Recent modest home price improvements in certain regions and
states, which we believe were positively affected by the impact
of state and federal government actions, including incentives to
first time homebuyers and foreclosure suspensions, led to a
slight improvement in loss severity used to estimate our loan
loss reserves in the third quarter of 2009, as compared to the
second quarter of 2009. However, we expect home prices are
likely to decline in the near term, which may result in
increasing single-family mortgage defaults and loss severity,
which would likely require us to increase our loan loss
reserves. Consequently, we expect our provisions for credit
losses will likely remain high during the remainder of 2009. The
level of our provision for credit losses in 2010 will depend on
a number of factors, including the impact of the
MHA Program on our loss mitigation efforts, changes in
property values, regional economic conditions, including
unemployment rates, third-party mortgage insurance coverage and
recoveries and the realized rate of seller/servicer repurchases.

REO
Operations (Income) Expense

REO operations (income) expense was $(96) million during
the three months ended September 30, 2009, as compared to
$333 million during the three months ended
September 30, 2008, and was $219 million and
$806 million during the nine months ended
September 30, 2009 and 2008, respectively. Our REO
operations results improved in the three and nine months ended
September 30, 2009 primarily as a result of lower
disposition losses and recoveries of property writedowns. We
recognize a writedown (when REO property values decrease) or
recovery, up to the original carrying value of an REO property
(when REO property values increase), for estimated changes in
REO fair value during the period properties are held, which is
included in REO operations expense. During the three months
ended September 30, 2009, our carrying values and
disposition values were more closely aligned due to more stable
national home prices, reducing the size of our disposition
losses.

Single-family REO disposition losses, excluding our holding
period allowance, totaled $125 million and
$191 million for the three months ended September 30,
2009 and 2008, respectively, and were $735 million and
$483 million during the nine months ended
September 30, 2009 and 2008, respectively. We also record
recoveries of charge-offs related to insurance reimbursement and
other third-party credit enhancements associated with foreclosed
properties as a reduction to REO operations expense. During the
three months ended September 30, 2009, the

combination of mortgage insurance and REO property value
recoveries was greater than the amount of our REO disposition
losses and other REO expenses and resulted in REO operations
income in the period.

Losses
on Loans Purchased

Losses on delinquent and modified loans purchased from the
mortgage pools underlying PCs and Structured Securities occur
when the acquisition basis of the purchased loan exceeds the
estimated fair value of the loan on the date of purchase. As a
result of increases in delinquency rates of loans underlying our
PCs and Structured Securities and our increasing efforts to
reduce foreclosures, the number of loan modifications increased
significantly during the nine months ended September 30,
2009, as compared to the nine months ended September 30,
2008. When a loan underlying our PCs and Structured Securities
is modified, we exercise our repurchase option and hold the
modified loan in our mortgage-related investments portfolio. See
Recoveries on Loans Impaired upon Purchase
and CONSOLIDATED BALANCE SHEETS ANALYSIS 
Mortgage-Related Investments Portfolio 
Table 21  Changes in Loans Purchased Under
Financial Guarantees for additional information about the
impacts of these loans on our financial results.

During the three and nine months ended September 30, 2009,
the market-based valuation of non-performing loans continued to
be adversely affected by the expectation of higher default costs
and reduced liquidity in the single-family mortgage market. Our
losses on loans purchased were $531 million and
$252 million for the three months ended September 30,
2009 and 2008, respectively, and totaled $3.7 billion and
$423 million for the nine months ended September 30,
2009 and 2008, respectively. The increase in losses on loans
purchased for the nine months ended September 30, 2009 is
attributed both to the increase in volume of our optional
repurchases of delinquent and modified loans underlying our
guarantees as well as a decline in market valuations for these
loans as compared to 2008. The growth in volume of our purchases
of delinquent and modified loans from our PC pools temporarily
slowed in the second and third quarters of 2009 primarily due to
our implementation of the loan modification process under HAMP.
Loans that we would have otherwise purchased remained in the PC
pools while the borrowers requested and began the trial period
payment plan under HAMP. The increase in losses on loans
purchased for the three months ended September 30, 2009 is
attributed to a decline in market valuations for these loans
compared to the three months ended September 30, 2008.

We could experience an increase in losses on loans purchased in
the fourth quarter of 2009, primarily due to the more than
88,000 loans in the trial period of HAMP as of
September 30, 2009, although the completion rate remains
uncertain. We also expect additional loans in our PC pools may
be purchased into our mortgage-related investments portfolio as
they reach 24 months of delinquency in the fourth quarter
of 2009 and in 2010. We purchased approximately 7,400 and
43,700 loans from PC pools during the three and nine months
ended September 30, 2009, respectively. This compares to
approximately 7,100 and 14,400 loans purchased from PC pools
during the three and nine months ended September 30, 2008,
respectively.

Securities
Administrator Loss on Investment Activity

In August 2008, acting as the security administrator for a trust
that holds mortgage loan pools backing our PCs, we invested in
$1.2 billion of short-term, unsecured loans which we made
to Lehman on the trusts behalf. We refer to these loans as
the Lehman short-term transactions. These transactions were due
to mature on September 15, 2008; however, Lehman failed to
repay these loans and the accrued interest. On
September 15, 2008, Lehman filed a chapter 11
bankruptcy petition in the Bankruptcy Court for the Southern
District of New York. To the extent there is a loss related to
an eligible investment for the trust, we, as the administrator,
are responsible for making up that shortfall. During the third
quarter of 2008, we recorded a non-recurring $1.1 billion
loss to reduce the carrying amount of this asset to our estimate
of the net realizable amount on these loans. On
September 22, 2009, we filed proofs of claim in the Lehman
bankruptcies.

Income
Tax Benefit (Expense)

For the three months ended September 30, 2009 and 2008, we
reported an income tax benefit (expense) of $149 million
and $(8.0) billion, respectively. For the nine months ended
September 30, 2009 and 2008 we reported an income tax
benefit (expense) of $1.3 billion and $(6.5) billion,
respectively. See NOTE 12: INCOME TAXES to our
consolidated financial statements for additional information.

Segment
Earnings

Our operations consist of three reportable segments, which are
based on the type of business activities each
performs  Investments, Single-family Guarantee and
Multifamily. Certain activities that are not part of a segment
are included in the All Other category; this category consists
of certain unallocated corporate items, such as costs associated
with remediating our internal controls and near-term
restructuring costs, costs related to the resolution of

certain legal matters and certain income tax items. We manage
and evaluate performance of the segments and All Other using a
Segment Earnings approach, subject to the conduct of our
business under the direction of the Conservator. The objectives
set forth for us under our charter and by our Conservator, as
well as the restrictions on our business under the Purchase
Agreement with Treasury, may negatively impact our Segment
Earnings and the performance of individual segments.

Segment Earnings is calculated for the segments by adjusting
GAAP net income (loss) for certain investment-related activities
and credit guarantee-related activities. Segment Earnings also
includes certain reclassifications among income and expense
categories that have no impact on net income (loss) but provide
us with a meaningful metric to assess the performance of each
segment and our company as a whole. We continue to assess the
methodologies used for segment reporting and refinements may be
made in future periods. Segment Earnings does not include the
effect of the establishment of the valuation allowance against
our deferred tax assets, net. See NOTE 16: SEGMENT
REPORTING to our consolidated financial statements for
further information regarding our segments and the adjustments
and reclassifications used to calculate Segment Earnings, as
well as the allocation process used to generate our segment
results.

In the third quarter of 2009, we reclassified our investments in
commercial mortgage-backed securities and all related income and
expenses from the Investments segment to the Multifamily
segment. This reclassification better aligns the financial
results related to these securities with management
responsibility. Prior periods have been reclassified to conform
to the current presentation.

Includes an allocation of the non-cash charge related to the
establishment of the partial valuation allowance against our
deferred tax assets, net that is not included in Segment
Earnings. 2008 amounts have been revised to reflect this
allocation.

(2)

Based on unpaid principal balance and excludes mortgage-related
securities traded, but not yet settled.

(3)

Excludes single-family mortgage loans.

Segment Earnings for our Investments segment increased
$1.2 billion for the three months ended September 30,
2009 compared to the three months ended September 30, 2008,
primarily due to (a) a decrease in net impairment of
available-for-sale
non-agency mortgage-related securities recognized in Segment
Earnings and (b) a non-recurring securities administrator
loss on investment activity of $1.1 billion related to the
September 2008 bankruptcy of Lehman Brothers Holdings, Inc.
recorded for the three months ended September 30, 2008.

Segment Earnings for our Investments segment decreased
$1.1 billion for the nine months ended September 30,
2009 compared to the nine months ended September 30, 2008,
primarily due to an increase in net impairment of
available-for-sale
non-agency mortgage-related securities recognized in Segment
Earnings, partially offset by an increase in Segment Earnings
net interest income. The results for the nine months ended
September 30, 2008 included a non-recurring securities
administrator loss on investment activity of $1.1 billion
related to the September 2008 bankruptcy of Lehman Brothers
Holdings, Inc.

Net impairment of available-for-sale securities recognized in
earnings decreased to $1.1 billion during the three months
ended September 30, 2009 due to a decrease in expected
credit-related losses on our non-agency mortgage-related
securities, compared to $1.9 billion of net impairment of
available-for-sale securities recognized in earnings during the
three months ended September 30, 2008. Net impairment of
available-for-sale securities recognized in earnings increased
to $7.7 billion during the nine months ended
September 30, 2009 compared to $2.0 billion during the
nine months ended September 30, 2008 due to an increase in
expected credit-related losses on our non-agency
mortgage-related securities primarily recognized during the
first half of 2009. Security impairments that reflect expected
or realized credit-related losses are realized in earnings
immediately in both our GAAP results and in Segment Earnings.
Impairments on securities we intend to sell or more likely than
not will be required to sell prior to anticipated recovery are
recognized in our GAAP results immediately but are excluded from
Segment Earnings.

Segment Earnings net interest income increased $29 million
while Segment Earnings net interest yield decreased 2 basis
points to 71 basis points for the three months ended
September 30, 2009 compared to the three months ended
September 30, 2008. Segment Earnings net interest income
increased $2.7 billion and Segment Earnings net interest
yield increased 40 basis points to 98 basis points for
the nine months ended September 30, 2009 compared to the
nine months ended September 30, 2008. The primary drivers
underlying the increases in Segment Earnings net interest income
for the 2009 periods were (a) a decrease in funding costs
as a result of the replacement of higher cost short- and
long-term debt with lower cost debt and (b) an increase in
the average size of our mortgage-related investments portfolio
including an increase in our holdings of fixed-rate assets. Net
interest income and net interest yield during the three and nine
months ended September 30, 2009 also benefited from the
receipt of funds from Treasury under the Purchase Agreement.
These funds generate net interest income because the costs of
such funds are not reflected in interest expense, but instead as
dividends paid on senior preferred stock.

The increase in Investments segment net interest income for the
2009 periods was partially offset by increases in
(i) derivative cash amortization expense primarily
associated with purchased swaptions, and (ii) derivative
interest carry expense on net pay-fixed interest rate swaps.
Both of these items are recognized within net interest income in
Segment Earnings. The prepayment option risk, or negative
convexity, of our mortgage assets increased significantly
largely due to the low interest rate environment of the first
half of 2009 as well as refinancing expectations as a result of
our implementation of the MHA Program. In order to mitigate this
increased risk, we increased our swaption purchase activity
during the second and third quarters of 2009. The payments of
up-front premiums associated with these purchased swaptions are
amortized prospectively on a straight-line basis into net
interest income in Segment Earnings over the option period to
reflect the periodic cost associated with the protection
provided by the option contract.

During the nine months ended September 30, 2009, the
mortgage-related investments portfolio of our Investments
segment declined at an annualized rate of 5.4%, compared to a
1.3% increase for the nine months ended September 30, 2008.
The unpaid principal balance of the mortgage-related investments
portfolio of our Investments segment increased from
$603 billion at September 30, 2008 to
$667 billion at December 31, 2008, and then decreased
to $640 billion at September 30, 2009. The portfolio
decreased in 2009 due to a relative lack of favorable investment
opportunities caused by tighter spreads on agency
mortgage-related securities as a result of the Federal
Reserves and Treasurys purchases of agency
mortgage-related securities in the market. For information on
the potential impact of (i) the termination of these
purchase programs and (ii) the requirement to reduce the
mortgage-related investments portfolio by 10% annually,
beginning in 2010, see CONSOLIDATED BALANCE SHEETS
ANALYSIS  Mortgage-Related Investments
Portfolio and LIQUIDITY AND CAPITAL
RESOURCES  Liquidity.

We held $67.5 billion of non-Freddie Mac agency
mortgage-related securities and $118.3 billion of
non-agency mortgage-related securities as of September 30,
2009 compared to $70.2 billion of non-Freddie Mac agency
mortgage-related securities and $133.7 billion of
non-agency mortgage-related securities as of December 31,
2008. The decline in the unpaid principal balance of non-agency
mortgage-related securities is due primarily to the receipt of
monthly remittances of principal repayments from both the
recoveries of liquidated loans and, to a lesser extent,
voluntary prepayments on the underlying collateral of these
securities. Agency securities comprised approximately 74% of the
unpaid principal balance of the Investments Segment
mortgage-related investments portfolio at both
September 30, 2009 and December 31, 2008. See
CONSOLIDATED BALANCE SHEETS ANALYSIS 
Mortgage-Related Investments Portfolio for additional
information regarding our mortgage-related securities.

The objectives set forth for us under our charter and
conservatorship and restrictions set forth in the Purchase
Agreement may negatively impact our Investments segment results
over the long term. For example, the required reduction pursuant
to the Purchase Agreement in our mortgage-related investments
portfolio balance to $250 billion, through successive
annual 10% declines commencing in 2010, will cause a
corresponding reduction in our net interest income from these
assets. We expect this will negatively affect our Investments
segment results.

Single-Family
Guarantee Segment

In our Single-family Guarantee segment, we guarantee the payment
of principal and interest on single-family mortgage-related
securities, including those held in our mortgage-related
investments portfolio, in exchange for monthly management and
guarantee fees and other up-front compensation. Earnings for
this segment consist primarily of management and guarantee fee
revenues less the related credit costs (i.e., provision
for credit losses) and operating expenses. Earnings for this
segment also include the interest earned on assets held in the
Investments segment related to single-family guarantee
activities, net of allocated funding costs and amounts related
to expected net float benefits.

Includes an allocation of the non-cash charge related to the
partial valuation allowance recorded against our deferred tax
assets, net that is not included in Segment Earnings. 2008
amounts have been revised to reflect this allocation.

Represents the percentage of loans in our single-family credit
guarantee portfolio, based on loan count, which are 90 days
or more past due at period end and excluding loans underlying
Structured Transactions. See RISK MANAGEMENT 
Credit Risks  Credit Performance 
Delinquencies for additional information.

(6)

Represents the percentage of loans that have been reported as
90 days or more delinquent or in foreclosure in the same
quarter of the preceding year that have transitioned to REO. The
rate excludes other dispositions that can result in a loss, such
as short-sales and
deed-in-lieu
transactions.

(7)

Source: Federal Reserve Flow of Funds Accounts of the United
States of America dated September 17, 2009.

(8)

Based on Freddie Macs PMMS rate. Represents the national
average mortgage commitment rate to a qualified borrower
exclusive of the fees and points required by the lender. This
commitment rate applies only to conventional financing on
conforming mortgages with LTV ratios of 80% or less.

Segment Earnings (loss) for our Single-family Guarantee segment
increased to a loss of $(4.3) billion for the third quarter
of 2009, compared to a loss of $(3.5) billion for the third
quarter of 2008. This increase primarily reflects higher
credit-related expenses of $1.1 billion due to continued
credit deterioration in the single-family portfolio as evidenced
by higher rates of delinquency. Segment Earnings management and
guarantee income increased slightly for the three and nine
months ended September 30, 2009, compared to the same
periods in 2008, primarily due to higher balances of our issued
guarantees as well as increased credit fee amortization.
Amortization of fees was accelerated as a result of increased
liquidation, or prepayment, rates on the related loans, which is
attributed to higher refinance activity in the 2009 periods.
Higher credit fee amortization in the 2009 periods was partially
offset by lower average contractual management and guarantee
rates as compared to the three and nine months ended
September 30, 2008.

We implemented additional delivery fee increases effective
September 1, 2009 and October 1, 2009, for mortgages
with certain combinations of LTV ratios and other higher-risk
loan characteristics. Although we increased delivery fees during
2009, we have been experiencing competitive pressure on our
contractual management and guarantee rates, which limited our
ability to increase our rates as customers renew their
contracts. Due to these competitive pressures,

we do not have the ability to raise our contractual guarantee
and management rates to offset the increased provision for
credit losses on existing business. Consequently, we expect to
continue to report Segment Earnings (loss), net of taxes for the
Single-family Guarantee segment for the foreseeable future.

Table 15 below provides summary information about Segment
Earnings management and guarantee income for this segment.
Segment Earnings management and guarantee income consists of
contractual amounts due to us related to our management and
guarantee fees as well as amortization of credit fees.

Reclassification between net interest income and management and
guarantee
fee(1)

57

53

175

147

Credit guarantee-related activity
adjustments(2)

(177

)

(124

)

(712

)

(441

)

Multifamily management and guarantee
income(3)

22

20

65

54

Management and guarantee income, GAAP

$

800

$

832

$

2,290

$

2,378

(1)

Management and guarantee fees earned on mortgage loans held in
our mortgage-related investments portfolio are reclassified from
net interest income within the Investments segment to management
and guarantee fees within the Single-family Guarantee segment.
Buy-up and buy-down fees are transferred from the Single-family
Guarantee segment to the Investments segment.

(2)

Primarily represent credit fee amortization adjustments.

(3)

Represents management and guarantee income recognized related to
our Multifamily segment that is not included in our
Single-family Guarantee segment.

For the nine months ended September 30, 2009 and 2008, the
annualized growth rates of our single-family credit guarantee
portfolio were 2.5% and 7.1%, respectively. Our mortgage
purchase volumes are impacted by several factors, including
origination volumes, mortgage product and underwriting trends,
competition, customer-specific behavior, contract terms, and
governmental initiatives concerning our business activities.
Origination volumes are also affected by government programs,
such as the Home Affordable Refinance Program. Single-family
mortgage purchase volumes from individual customers can
fluctuate significantly. Despite these fluctuations, our share
of the overall single-family mortgage origination market was
higher in the nine months ended September 30, 2009 as
compared to the nine months ended September 30, 2008, as
mortgage originators have generally tightened their credit
standards, causing conforming mortgages to be the predominant
product in the market during 2009. We have also tightened our
own guidelines for mortgages we purchase and we have seen
improvements in the credit quality of mortgages delivered to us
in 2009. We experienced an increase in refinance activity in
2009 caused by declines in mortgage interest rates as well as
our support of the Home Affordable Refinance Program.

Our Segment Earnings provision for credit losses for the
Single-family Guarantee segment increased to $7.5 billion
for the three months ended September 30, 2009 compared to
$5.9 billion for the three months ended
September 30, 2008. Segment Earnings provision for credit
losses was $22.7 billion and $9.9 billion for the nine
months ended September 30, 2009 and 2008, respectively.
Mortgages in our single-family credit guarantee portfolio
experienced significantly higher delinquency rates, higher
transition rates to foreclosure, as well as higher loss
severities on a per-property basis in the nine months ended
September 30, 2009 than in the nine months ended
September 30, 2008. Our provision for credit losses is
based on our estimate of incurred losses inherent in both our
single-family credit guarantee portfolio and the single-family
mortgage loans in our mortgage-related investments portfolio
using recent historical performance, such as trends in
delinquency rates, recent charge-off experience, recoveries from
credit enhancements and other loss mitigation activities.

The delinquency rate on our single-family credit guarantee
portfolio, excluding Structured Transactions, increased to 3.33%
as of September 30, 2009 from 1.72% as of December 31,
2008. Increases in delinquency rates occurred in all product
types for the three and nine months ended September 30,
2009. Increases in delinquency rates have been more severe in
the states of Nevada, Florida, Arizona and California. The
delinquency rates for loans in our single-family mortgage
portfolio, excluding Structured Transactions, related to the
states of Nevada, Florida, Arizona and California were 9.51%,
8.98%, 6.21% and 5.01%, respectively, as of September 30,
2009. We expect our delinquency rates will continue to rise in
the remainder of 2009.

Charge-offs, gross, associated with single-family loans
increased to $2.9 billion in the third quarter of 2009
compared to $1.2 billion in the third quarter of 2008,
primarily due to an increase in the volume of REO properties we
acquired through foreclosure transfers. Declining home prices
during much of the last two years resulted in higher
charge-offs, on a per property basis, during the third quarter
of 2009 compared to the third quarter of 2008. We expect our
charge-offs and credit losses to increase in the remainder of
2009. See RISK MANAGEMENT  Credit
Risks  Table 53  Single-Family Credit
Loss Concentration Analysis for additional delinquency and
credit loss information.

Single-family Guarantee REO operations income (expense) improved
during the three and nine months ended September 30, 2009,
compared to the same periods in 2008. REO operations expense
decreased in the 2009 periods as a result of lower disposition
losses and recovery of previous holding period writedowns. In
addition, during the 2009 periods, our existing and newly
acquired REO required fewer market-based write-downs due to more
stable home prices. We expect REO operations expense to
fluctuate in the remainder of 2009, as single-family REO
acquisition volume increases and home prices remain under
downward pressure.

During the nine months ended September 30, 2009, we
experienced significant increases in REO activity in all regions
of the U.S., particularly in the states of California, Florida,
Arizona, Nevada and Michigan. The West region represented
approximately 35% and 30% of our REO property acquisitions
during the nine months ended September 30, 2009 and 2008,
respectively, based on the number of units. The highest
concentration in the West region is in the state of California.
At September 30, 2009, our REO inventory in California
comprised 15% of total REO property inventory, based on units,
and approximately 24% of our total REO property inventory, based
on loan amount prior to acquisition. California has accounted
for a significant amount of our credit losses and losses on our
loans in this state comprised approximately 34% of our total
credit losses in the third quarter of 2009.

We temporarily suspended all foreclosure transfers on occupied
homes from November 26, 2008 through January 31, 2009
and from February 14, 2009 through March 6, 2009.
Beginning March 7, 2009, we began suspension of foreclosure
transfers on owner-occupied homes where the borrower may be
eligible to receive a loan modification under the MHA Program.
As a result of our suspension of foreclosure transfers, we
experienced an increase in single-family delinquency rates and a
slow-down in the rate of growth of REO acquisitions and REO
inventory during the nine months ended September 30, 2009,
as compared to what we would have experienced without these
actions. Our suspension or delay of foreclosure transfers and
any imposed delay in foreclosures by regulatory or governmental
agencies also causes a delay in our recognition of credit losses
and our loan loss reserves to increase. See RISK
MANAGEMENT  Credit Risks  Loss
Mitigation Activities for further information on these
programs.

Approximately 27% of loans in our single-family credit guarantee
portfolio had estimated current LTV ratios above 90% at
September 30, 2009, compared to 17% at September 30,
2008. In general, higher total LTV ratios indicate that the
borrower has less equity in the home and would thus be more
likely to default in the event of a financial hardship. There
was a slight increase in national home prices during the nine
months ended September 30, 2009. The second and third
quarters of the year are historically strong periods for home
sales. Seasonal strength, along with the impact of state and
federal government actions, including incentives for first time
home buyers and foreclosure suspensions, may have contributed to
the increase in home prices during 2009. We expect that when
temporary government actions expire and the seasonal peak in
home sales has passed, home prices are likely to decline during
the near term. Generally, decreases in home prices will result
in increases to current LTV ratios. We expect that declines in
home prices combined with the deterioration in rates of
unemployment and other factors will result in continued high
credit losses for our Single-family Guarantee segment during the
remainder of 2009 and in 2010.

Multifamily
Segment

Through our Multifamily segment, we purchase multifamily
mortgages and CMBS for investment, and securitize and guarantee
the payment of principal and interest on multifamily
mortgage-related securities and mortgages underlying multifamily
housing revenue bonds. The mortgage loans of the Multifamily
segment consist of mortgages that are secured by properties with
five or more residential rental units. We typically hold
multifamily loans for investment purposes. In 2008, we began
holding multifamily mortgages designated
held-for-sale
as part of our initiative to offer securitization capabilities
to the market and our customers.

Includes an allocation of the non-cash charge related to the
partial valuation allowance recorded against our deferred tax
assets, net that is not included in Segment Earnings. 2008
amounts have been revised to reflect this allocation.

(2)

Based on unpaid principal balance.

(3)

Based on net carrying value of mortgages in the multifamily loan
and guarantee portfolios that are 90 days or more
delinquent as well as those in the process of foreclosure and
excluding Structured Transactions. Excludes loans underlying the
multifamily investment securities portfolio.

Segment Earnings for our Multifamily segment decreased to
$99 million for the third quarter of 2009 compared to
$193 million for the third quarter of 2008. Segment
Earnings for the Multifamily segment were $394 million and
$527 million for the nine months ended September 30,
2009 and 2008, respectively. The declines in Segment Earnings
for the three and nine months ended September 30, 2009 as
compared to the corresponding periods in 2008 were primarily due
to higher non-interest expenses primarily caused by a higher
provision for credit losses. The decline in Segment Earnings for
the third quarter of 2009 as compared to the third quarter of
2008 was also due to other-than-temporary impairments on CMBS
within the multifamily investment securities portfolio.

Segment Earnings non-interest income (loss) was
$(147) million in the third quarter of 2009 compared to
$(85) million in the third quarter of 2008, and the
increase in loss is attributed to credit-related impairment
losses on CMBS in the third quarter of 2009. Impairment on CMBS
for both GAAP and Segment Earnings during the three and nine
months ended September 30, 2009 totaled $54 million.
This relates to four securities from one issuer that are
expected to incur contractual losses. There were no
other-than-temporary impairments on CMBS during the three and
nine months ended September 30, 2008. At September 30,
2009, a majority of our commercial mortgage backed securities
were
AAA-rated
and we believe the declines in fair value are mainly
attributable to the deterioration of liquidity and larger risk
premiums in the commercial mortgage-backed securities market
consistent with the broader credit markets rather than to the
performance of the underlying collateral supporting the
securities. We view the performance of the four securities
impaired during the third quarter of 2009 as significantly worse
than the remainder

of our CMBS, and while delinquencies for the remaining
securities have increased, we believe the credit enhancement
related to these bonds is currently sufficient to cover expected
losses on the underlying loans. Since we generally hold these
securities to maturity, we do not intend to sell these
securities and it is more likely than not that we will not be
required to sell such securities before recovery of the
unrealized losses.

We invest as a limited partner in LIHTC partnerships formed for
the purpose of providing equity funding for affordable
multifamily rental properties. We have determined that
individual partnerships whose carrying value exceeds fair value
are other-than-temporarily impaired and should be written down
to their fair value. See NOTE 3: VARIABLE INTEREST
ENTITIES to our consolidated financial statements for
additional information on this determination.
Other-than-temporary impairments that reflect expected or
realized credit-related losses on investment securities or a
change in expected earnings to be generated from our LIHTC
investments are realized in earnings immediately in both our
GAAP results and Segment Earnings. Any additional impairments
are not recognized for Segment Earnings. We recognized
$370 million and $379 million of other-than-temporary
impairment on LIHTC investments in our GAAP results during the
three and nine months ended September 30, 2009,
respectively, and recognized $8 million and
$17 million, respectively, of LIHTC related impairments in
Segment Earnings. The fair value of our LIHTC investments has
declined during 2009 as a result of the economic recession and
decrease in market demand for these partnership interests. If
the fair value of our partnership interests does not improve and
we are not able to complete sales or other transactions to
recover the benefits of our investment, it could result in
additional other-than-temporary impairment on our LIHTC
investments in the near term.

Segment Earnings non-interest expenses increased for the three
and nine months ended September 30, 2009 compared to the
same periods in 2008, primarily due to higher provision for
credit losses. The delinquency rate for loans in the multifamily
loan portfolio and multifamily guarantee portfolio, on a
combined basis, was 0.11% and 0.01% as of September 30,
2009 and December 31, 2008, respectively. The increase in
the delinquency rate for our multifamily loans during the nine
months ended September 30, 2009 is principally from loans
on properties located in the states of Georgia and Texas. We
expect an increase in our multifamily delinquency rates during
the remainder of 2009 as multifamily fundamentals and apartment
net operating incomes remain under pressure. Market fundamentals
for multifamily properties we monitor have experienced the
greatest deterioration during the third quarter of 2009 in the
Southeast and West regions, particularly the states of Florida,
Nevada, California and Arizona. Refinance risk, which is the
risk that a multifamily borrower with a maturing balloon
mortgage will not be able to refinance and will instead default,
is high given the state of the economy, lack of liquidity,
deteriorating property cash flows, and declining property market
values. These factors contributed to the increase in our
provision for loan losses during the nine months ended
September 30, 2009. Our REO property inventory has
increased to seven properties as of September 30, 2009. REO
operations expenses in the nine months ended September 30,
2009 primarily relate to fair value write-down of the properties
in inventory due to market conditions. We had two REO
acquisitions and two REO dispositions during the third quarter
of 2009 and all activity was related to properties in the
Southeast region.

We continued to provide stability and liquidity for the
financing of rental housing through our purchases and credit
guarantees of multifamily mortgage loans. In October 2009, we
completed a structured securitization transaction with
multifamily mortgage loans of approximately $1 billion.
This Structured Transaction was backed by 46 multifamily
loans and was the second of such transactions this year. We
expect to complete additional transactions in 2010, if market
conditions are appropriate.

The following discussion of our consolidated balance sheets
should be read in conjunction with our consolidated financial
statements, including the accompanying notes. Also see
CRITICAL ACCOUNTING POLICIES AND ESTIMATES for more
information concerning our more significant accounting policies
and estimates applied in determining our reported financial
position.

Federal funds sold and securities purchased under agreements to
resell:

Federal funds sold

550



Securities purchased under agreements to resell

9,000

10,150

Total federal funds sold and securities purchased under
agreements to resell

9,550

10,150

Total cash and other investments portfolio

$

83,696

$

64,270

Our cash and other investments portfolio is important to our
cash flow and asset and liability management and our ability to
provide liquidity and stability to the mortgage market, as
discussed in MD&A  CONSOLIDATED BALANCE
SHEETS ANALYSIS  Cash and Other Investments
Portfolio in our 2008 Annual Report. We use this portfolio
to manage our liquidity until we have mortgage-related
investments or credit guarantee opportunities. Cash and cash
equivalents comprised $55.6 billion of the
$83.7 billion in this portfolio as of September 30,
2009. At September 30, 2009, the investments in this
portfolio also included $5.9 billion of
non-mortgage-related asset-backed securities and
$12.4 billion of Treasury bills that we could sell to
provide us with an additional source of liquidity to fund our
business operations.

During the nine months ended September 30, 2009, we
increased the balance of our cash and other investments
portfolio by $19.4 billion, primarily due to a
$10.3 billion increase in cash and cash equivalents and a
$9.7 billion increase in non-mortgage-related securities,
principally comprised of Treasury bills. The portfolio balance
increased, in part, due to a relative lack of favorable
investment opportunities over the past two quarters for
mortgage-related investments.

We recorded net impairment of available-for-sale securities
recognized in earnings related to our cash and other investments
portfolio of $185 million during the nine months ended
September 30, 2009 for our non-mortgage-related
investments, as we could not assert that we did not intend to,
or we will not be required to, sell these securities before a
recovery of the unrealized losses. Such net impairments occurred
in the first and second quarters of 2009; no such net
impairments were recorded for the third quarter of 2009 as no
non-mortgage-related securities were in an unrealized loss
position at September 30, 2009. The decision to impair
these securities is consistent with our consideration of
securities from the cash and other investments portfolio as a
contingent source of liquidity. We do not expect any contractual
cash shortfalls related to these securities. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  Change in Accounting Principles 
Change in the Impairment Model for Debt Securities
to our consolidated financial statements for information on
how other-than-temporary impairments are recorded on our
financial statements commencing in the second quarter of 2009.

During the three and nine months ended September 30, 2008,
we recorded $245 million and $458 million,
respectively, of net impairment of available-for-sale securities
recognized in earnings related to investments in
non-mortgage-related asset-backed securities within our cash and
other investments portfolio as we could no longer assert the
positive intent to hold these securities to recovery. The
non-mortgage-related securities impaired during the third
quarter of 2008 had $9.9 billion of unpaid principal
balances at September 30, 2008.

Table 18 provides credit ratings of the
non-mortgage-related asset-backed securities in our cash and
other investments portfolio at September 30, 2009.
Table 18 includes securities classified as either
available-for-sale or trading on our consolidated balance sheets.

Reflects the composition of the portfolio that was
AAA-rated as
of the date of our acquisition of the security, based on unpaid
principal balance and the lowest rating available.

(2)

Reflects the
AAA-rated
composition of the securities as of October 30, 2009, based
on unpaid principal balance as of September 30, 2009 and
the lowest rating available.

(3)

Reflects the composition of these securities with credit ratings
BBB or above as of October 30, 2009, based on unpaid
principal balance as of September 30, 2009 and the lowest
rating available.

(4)

Consists of securities backed by liens secured by fixed assets
owned by regulated public utilities.

Mortgage-Related
Investments Portfolio

We are primarily a
buy-and-hold
investor in mortgage assets. We invest principally in mortgage
loans and mortgage-related securities, which consist of
securities issued by us, Fannie Mae, Ginnie Mae and other
financial institutions. We refer to these mortgage loans and
mortgage-related securities that are recorded on our
consolidated balance sheets as our mortgage-related investments
portfolio. Our mortgage-related securities are classified as
either
available-for-sale
or trading on our consolidated balance sheets.

Under the Purchase Agreement with Treasury and FHFA regulation,
our mortgage-related investments portfolio may not exceed
$900 billion as of December 31, 2009 and then must
decline by 10% per year thereafter until it reaches
$250 billion. The first of the annual 10% portfolio
reductions is effective on December 31, 2010 and will be
calculated relative to the actual balance of our
mortgage-related investments portfolio on December 31,
2009. This could constrain our ability to purchase mortgages and
mortgage-related securities in 2010. We may be required to sell
mortgage-related assets in 2010 to meet the required 10%
reduction, particularly given the potential for significant
increases in loan modifications and delinquent loans, which
result in the purchase of mortgage loans for our
mortgage-related investments portfolio as currently measured
under the Purchase Agreement. The amount of assets that we may
be required to sell in 2010, if any, will depend on factors
including the actual balance of our mortgage-related investments
portfolio at year-end 2009 (which will determine the portfolio
limit for 2010), level of liquidations and volume of loan
modifications.

Our mortgage-related investments portfolio decreased during the
nine months ended September 30, 2009 due to a relative lack
of favorable investments opportunities, as evidenced by tighter
spreads on agency mortgage-related securities. We believe these
tighter spread levels are driven by the Federal Reserves
and Treasurys agency mortgage-related securities purchase
programs. Investment opportunities for agency mortgage-related
securities could remain limited while these purchase programs
remain in effect.

Variable-rate single-family mortgage loans and mortgage-related
securities include those with a contractual coupon rate that,
prior to contractual maturity, is either scheduled to change or
is subject to change based on changes in the composition of the
underlying collateral. Single-family mortgage loans also include
mortgages with balloon/reset provisions.

Variable-rate multifamily mortgage loans include only those
loans that, as of the reporting date, have a contractual coupon
rate that is subject to change.

(4)

For our PCs and Structured Securities, we are subject to the
credit risk associated with the underlying mortgage loan
collateral.

(5)

Agency mortgage-related securities are generally not separately
rated by nationally recognized statistical rating organizations,
but are viewed as having a level of credit quality at least
equivalent to non-agency mortgage-related securities rated AAA
or equivalent.

(6)

Single-family non-agency mortgage-related securities backed by
subprime, option ARM,
Alt-A and
other mortgage loans include significant credit enhancements,
particularly through subordination. For information about how
these securities are rated, see Table 24 
Ratings of
Available-For-Sale
Non-Agency Mortgage-Related Securities backed by Subprime,
Option ARM,
Alt-A and
Other Loans at September 30, 2009 and December 31,
2008 and Table 25  Ratings Trend of
Available-For-Sale
Non-Agency Mortgage-Related Securities backed by Subprime,
Option ARM,
Alt-A and
Other Loans.

(7)

Consists of mortgage revenue bonds. Approximately 55% and 58% of
these securities held at September 30, 2009 and
December 31, 2008, respectively, were
AAA-rated as
of those dates, based on the lowest rating available.

(8)

At September 30, 2009 and December 31, 2008, 19% and
32%, respectively, of mortgage-related securities backed by
manufactured housing were rated BBB or above, based on the
lowest rating available. For both dates, 91% of mortgage-related
securities backed by manufactured housing had credit
enhancements, including primary monoline insurance, that covered
23% of the mortgage-related securities backed by manufactured
housing based on the unpaid principal balance. At both
September 30, 2009 and December 31, 2008, we had
secondary insurance on 60% of these securities that were not
covered by the primary monoline insurance, based on the unpaid
principal balance. Approximately 3% of the mortgage-related
securities backed by manufactured housing were
AAA-rated at
both September 30, 2009 and December 31, 2008 based on
the unpaid principal balance and the lowest rating available.

(9)

Credit ratings for most non-agency mortgage-related securities
are designated by no fewer than two nationally recognized
statistical rating organizations. Approximately 32% and 55% of
total non-agency mortgage-related securities held at
September 30, 2009 and December 31, 2008,
respectively, were
AAA-rated as
of those dates, based on the unpaid principal balance and the
lowest rating available.

The unpaid principal balance of our mortgage-related investments
portfolio decreased by $20.6 billion to $784.2 billion
at September 30, 2009 compared to December 31, 2008
due to the relative lack of favorable investment opportunities
for mortgage-related securities. The decrease in agency
mortgage-related securities balances was partially offset by an
increase in purchases of single and multifamily loans.

The unpaid principal balance of multifamily loans in our
mortgage-related investments portfolio increased from
$72.7 billion at December 31, 2008 to
$81.2 billion at September 30, 2009, an increase of
12%, primarily due to limited market participation by non-GSE
investors. We expect industry-wide loan demand to remain weak
for the rest of 2009. While we expect our multifamily loan
portfolio to further increase in the fourth quarter of 2009, the
rate of growth has slowed, reflecting the markets
contraction.

The unpaid principal balance of single-family loans in our
mortgage-related investments portfolio increased from
$38.8 billion at December 31, 2008 to
$50.6 billion at September 30, 2009, an increase of
30%, primarily due to increased purchases of delinquent and
modified loans from the mortgage pools underlying our PCs and
Structured Securities and increased cash purchase activity. As
mortgage interest rates declined during 2009, single-family
refinance mortgage originations increased and the volume of
deliveries of single-family mortgage loans to us for cash
purchase rather than for guarantor swap transactions also
increased.

Higher
Risk Components of Our Mortgage-Related Investments
Portfolio

As discussed below, we have exposure to subprime,
Alt-A,
interest-only and option ARM loans in our mortgage-related
investments portfolio as follows:



Single-family mortgage loans: We hold
Alt-A and
interest-only loans in our mortgage-related investments
portfolio, which are primarily those purchased from PCs. We do
not hold significant amounts of option ARM loans in our
mortgage-related investments portfolio. We generally do not
classify the single-family mortgage loans in our
mortgage-related investments portfolio as either prime or
subprime; however, there are mortgage loans within our
mortgage-related investments portfolio with higher risk
characteristics than other mortgage loans.

During the nine months ended September 30, 2009, we did not
buy or sell any non-agency mortgage-related securities backed by
subprime, option ARM or
Alt-A loans.
As discussed below, we recognized significant impairment and
unrealized losses on our holdings of such securities in the nine
months ended September 30, 2009. See
Table 23  Net Impairment on
Available-For-Sale Mortgage-Related Securities Recognized in
Earnings for more information. We believe that the
declines in fair values for these securities are attributable to
poor underlying collateral performance and decreased liquidity
and larger risk premiums in the mortgage market.

Higher
Risk Single-Family Mortgage Loans

Participants in the mortgage market often characterize
single-family loans based upon their overall credit quality at
the time of origination, generally considering them to be prime
or subprime. There is no universally accepted definition of
subprime. The subprime segment of the mortgage market primarily
serves borrowers with poorer credit payment histories and such
loans typically have a mix of credit characteristics that
indicate a higher likelihood of default and higher loss
severities than prime loans. Such characteristics might include
a combination of high LTV ratios, low credit scores or
originations using lower underwriting standards such as limited
or no documentation of a borrowers income and/or assets.
Mortgage loans with higher LTV ratios have a higher risk of
default, especially during housing and economic downturns, such
as the one the U.S. has experienced for the past few years. Many
financial institutions have classified their residential
mortgages as subprime if the FICO credit score of the borrower
is below 620, without regard to any other loan characteristics.
For information on loans we hold where the original FICO score
of the borrower is less than 620, see
Table 20  Higher-Risk Single-Family Loans
that we hold in the Mortgage-Related Investments
Portfolio. Second lien mortgages are another type of
residential loan product that has higher risk of default;
however, we do not purchase or hold significant amounts of these
loans in our single-family guarantee business.

Although there is no universally accepted definition of
Alt-A, many
mortgage market participants classify single-family loans with
credit characteristics that range between their prime and
subprime categories as
Alt-A
because these loans have a combination of characteristics of
each category, or may be underwritten with lower or alternative
income or asset documentation requirements compared to a full
documentation mortgage loan. In determining our
Alt-A
exposure on loans underlying our single-family mortgage
portfolio, we have classified mortgage loans as
Alt-A if the
lender that delivers them to us has classified the loans as
Alt-A, or if
the loans had reduced documentation requirements, as well as a
combination of certain credit attributes and expected
performance characteristics at acquisition which, when compared
to full documentation loans in our portfolio, indicate that the
loan should be classified as
Alt-A. There
are circumstances where loans with reduced documentation are not
classified as
Alt-A
because we already own the credit risk on the loans or the loans
fall within various programs which we believe support not
classifying the loans as
Alt-A. For
our non-agency mortgage-related securities that are backed by
Alt-A loans,
we classified securities as
Alt-A if the
securities were labeled as
Alt-A when
sold to us.

Table 20 presents information about single-family mortgage
loans that we hold in our mortgage-related investments portfolio
that have certain higher risk characteristics. See RISK
MANAGEMENT  Credit Risks 
Table 42  Higher-Risk Loans in the Single-Family
Mortgage Portfolio for information on the higher-risk
single-family loans in our single-family mortgage portfolio,
which generally consists of (i) single-family loans held in
our mortgage-related investments portfolio and
(ii) single-family loans underlying our issued PCs and
Structured Securities. Higher-risk loans include both loan
products where the loan product itself creates higher risk and
loans where the borrower characteristics present higher-risk at
origination. The following table includes a presentation of each
higher-risk characteristic in isolation. So, a single loan may
fall within more than one category (for example, an
interest-only loan may also have a borrower with an original LTV
ratio greater than 90%).

Higher risk categories are not additive and a single loan may be
included in multiple categories if more than one characteristic
is associated with the loan.

(2)

Based on our first lien exposure on the property and excludes
secondary financing by third parties, if applicable. For
refinancing mortgages, the estimated current LTVs are based on
third-party appraisals used in loan origination, whereas new
purchase mortgages are based on the property sales price.

(3)

Represents the percentage of loans based on loan counts held on
our consolidated balance sheet that have been modified under
agreement with the borrower, including those with no changes in
terms where past due amounts are added to the outstanding
principal balance of the loan.

(4)

Based on the number of mortgages 90 days or more delinquent
or in foreclosure. See CREDIT RISKS  Mortgage
Credit Risk  Delinquency for further
information about our delinquency rates.

(5)

See footnote (2) to Table 41 
Characteristics of the Single-Family Mortgage Portfolio
for information about our calculation of original LTV ratios.

Loans with a combination of higher-risk attributes will have an
even higher risk of default than those with an individual
higher-risk characteristic. For example, we estimate that there
were $2.3 billion and $1.7 billion at
September 30, 2009 and December 31, 2008,
respectively, of loans with both original LTV ratios greater
than 90% and FICO credit scores less than 620 at the time of
loan origination. See RISK MANAGEMENT  Credit
Risks  Mortgage Credit Risk for further
information on single-family mortgage product types and
characteristics, including those loans underlying our guaranteed
PCs and Structured Securities.

A significant number of the single-family loans with higher risk
characteristics have been purchased out of PC pools under our
financial guarantees. For loans purchased out of PC pools due to
delinquency or modifications with

concessions to the borrower, we may recognize losses at the time
of purchase in order to reduce the unpaid principal balance of
the loan to its fair value.

Loans
Purchased Under Financial Guarantees

As securities administrator, we are required to purchase a
mortgage loan from a PC pool under certain circumstances at the
direction of a court of competent jurisdiction or a federal
government agency. Additionally, we are required to repurchase
all convertible ARMs out of PC pools when the borrower exercises
the option to convert the interest rate from an adjustable rate
to a fixed rate; and in the case of balloon/reset loans, shortly
before the mortgage reaches its scheduled balloon reset date.
During the nine months ended September 30, 2009 and 2008,
we purchased $963 million and $1.7 billion,
respectively, of convertible ARMs and balloon/reset loans out of
PC pools.

As guarantor, we also have the right to purchase mortgages that
back our PCs and Structured Securities (other than Structured
Transactions) from the underlying loan pools when they are
significantly past due or when we determine that loss of the
property is likely or default by the borrower is imminent due to
borrower incapacity, death or other extraordinary circumstances
that make future payments unlikely or impossible. This right to
repurchase mortgages or assets is known as our repurchase
option, and we exercise this option when we modify a mortgage.
We record loans that we purchase in connection with our
performance under our financial guarantees at fair value and
record losses on loans purchased on our consolidated statements
of operations in order to reduce our net investment in acquired
loans to their fair value. The table below presents activities
related to optional purchases of loans under financial
guarantees for the three and nine months ended
September 30, 2009 and 2008.

Table 21 
Changes in Loans Purchased Under Financial
Guarantees(1)

Three Months Ended September 30, 2009

Three Months Ended September 30, 2008

Unpaid

Purchase

Loan Loss

Net

Unpaid

Purchase

Loan Loss

Net

Principal Balance

Discount

Reserves

Investment

Principal Balance

Discount

Reserves

Investment

(in millions)

Beginning balance

$

15,381

$

(6,871

)

$

(92

)

$

8,418

$

6,099

$

(1,386

)

$

(6

)

$

4,707

Purchases of loans

1,238

(766

)



472

1,248

(385

)



863

Provision for credit losses





(2

)

(2

)





(50

)

(50

)

Principal
repayments(2)

(228

)

127

2

(99

)

(183

)

68

1

(114

)

Troubled debt restructurings

(55

)

23

1

(31

)

(57

)

17



(40

)

Property acquisitions, transferred to REO

(258

)

103

5

(150

)

(372

)

116

1

(255

)

Ending
balance(3)

$

16,078

$

(7,384

)

$

(86

)

$

8,608

$

6,735

$

(1,570

)

$

(54

)

$

5,111

Nine Months Ended September 30, 2009

Nine Months Ended September 30, 2008

Unpaid

Purchase

Loan Loss

Net

Unpaid

Purchase

Loan Loss

Net

Principal Balance

Discount

Reserves

Investment

Principal Balance

Discount

Reserves

Investment

(in millions)

Beginning balance

$

9,522

$

(3,097

)

$

(80

)

$

6,345

$

7,001

$

(1,767

)

$

(2

)

$

5,232

Purchases of loans

8,170

(5,070

)



3,100

2,394

(630

)



1,764

Provision for credit losses





(33

)

(33

)





(55

)

(55

)

Principal
repayments(2)

(325

)

273

6

(46

)

(693

)

207

1

(485

)

Troubled debt restructurings

(635

)

267

5

(363

)

(85

)

24



(61

)

Property acquisitions, transferred to REO

(654

)

243

16

(395

)

(1,882

)

596

2

(1,284

)

Ending
balance(3)

$

16,078

$

(7,384

)

$

(86

)

$

8,608

$

6,735

$

(1,570

)

$

(54

)

$

5,111

(1)

Consist of seriously delinquent or modified loans purchased at
our option in performance of our financial guarantees and in
accordance with accounting standards for loans and debt
securities acquired with deteriorated credit quality
(FASB ASC 310-30).

(2)

Includes the capitalization of past due interest on loans
subject to repayment or other agreements executed during the
period, which resulted in an increase in our net investment in
these loans during the three and nine months ended
September 30, 2009.

(3)

Includes loans that have subsequently returned to current status
under the original loan terms.

Our net investment in delinquent and modified loans purchased
under financial guarantees increased approximately 36% during
the nine months ended September 30, 2009. During that
period, we purchased approximately $8.2 billion in unpaid
principal balances of these loans with a fair value at
acquisition of $3.1 billion. The $5.1 billion purchase
discount consists of approximately $1.4 billion previously
recognized as loan loss reserve or guarantee obligation and
$3.7 billion of losses on loans purchased. We expect to
continue to incur losses on the purchase of delinquent or
modified loans in the fourth quarter of 2009. The volume and
severity of these losses is dependent on many factors, including
the rate of completion of loan modifications under HAMP, and
changes in fair values of delinquent or modified loans, which
are impacted by investor demand as well as regional changes in
home prices. See CONSOLIDATED RESULTS OF
OPERATIONS  Losses on Loans Purchased, for
further information.

As of September 30, 2009, the cure rate for loans that we
purchased out of PC pools during the first, second and third
quarters of 2009 was approximately 59%, 74% and 90%,
respectively. The cure rate is the percentage of loans

purchased with or without modification under our financial
guarantees that have returned to less than 90 days past due
or have been paid off, divided by the total number of loans
purchased under our financial guarantees. The cure rates for the
first and second quarters of 2009 are lower than those for the
third quarter of 2009 because a significant number of the
modifications in the first half of 2009 were completed as part
of a pilot program, offered in mid-2008, to complete
modifications of significantly delinquent loans on a broad
scale. Many of the delinquent borrowers in that pilot program,
including those whose modifications were completed in the first
half of 2009, did not meet their new payment obligations and
defaulted on their modified loans. Mortgages that remain in the
PC pools and reperform or proceed to foreclosure are not
included in these cure rate statistics.

Supplemental
Multifamily Mortgage Loans

Since the start of 2009, our multifamily mortgage loans have
generally been underwritten using requirements that currently
establish a maximum original LTV ratio of 75% and a minimum debt
service coverage ratio of 1.25. In certain circumstances, we may
purchase certain types of multifamily loans that have an
original LTV ratio over 75% or a debt service coverage ratio of
less than 1.25. We generally do not consider multifamily
products to be higher-risk at origination. We do make
investments in certain second and other junior lien loans on
multifamily properties on which we own the first lien mortgage,
which we refer to as supplemental loans. Beginning in 2009,
supplemental loans must have a maximum total LTV ratio of 75%
and minimum debt service coverage of 1.30 when combined with the
first lien mortgage. Supplemental loans generally allow the
existing borrower a lower cost option to obtain additional
financing without the added expense of refinancing the first
lien mortgage. We had supplemental multifamily loans
held-for-investment of $2.7 billion and $2.5 billion
in our mortgage-related investments portfolio as of
September 30, 2009 and December 31, 2008,
respectively, and at both dates these loans had average original
LTVs of approximately 65% and none of these loans was
90 days or more delinquent at either date. See CREDIT
RISKS  Mortgage Credit Risk  Multifamily
Mortgage Product Types for further information.

We classify our non-agency mortgage-related securities as
subprime, option ARM or
Alt-A if the
securities were labeled as such, when sold to us. Table 22
presents information about our holdings of these securities.